Manufacturing PMI remains a tale of weak growth, slow revival

The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) stood at 52.3 in August. A reading above 50 indicates expansion and below the threshold points to contraction. Even though PMI continued to be in expansion mode, the headline index declined from 55.3 in July, indicating that growth rate was subdued in the context of historical survey data. A softer upturn in sales led firms to pause their hiring efforts, with business confidence being hit by concerns over the impact of covid-19 on demand and firms’ finances.

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Manufacturers were relatively less impacted by the pandemic than service providers, but in face of the ongoing uncertainty, economists aren’t too gung-ho on the road ahead. “The bigger worry is the threat of further virus outbreaks. Admittedly, India’s vaccine roll-out has been gathering pace. But at the current pace, it would still take until Q1 next year to fully vaccinate 70% of the population,” said Darren Aw, Asia economist at Capital Economist Ltd.

“And the experience in Kerala illustrates how quickly the virus situation can change. Even if the outbreak in Kerala soon comes under control, the experience there underlines the risk of future virus waves occurring elsewhere,” he added.

Continuing the pessimistic tone, Miguel Chanco, senior Asia economist at Pantheon Macroeconomics, said, “A return to the persistent mid-to-high 50s enjoyed immediately after last year’s debilitating nationwide lockdown is highly unlikely, given the additional damage to households and businesses caused by the second wave.”

“Moreover, no fiscal support is forthcoming,” he added.

Apart from a sombre demand environment, what is also bothering manufacturers is elevated input cost inflation and their inability to fully pass on this cost increase to consumers.

Indian manufacturers signalled another monthly rise in cost burdens in August, taking the current stretch of inflation to 13 months, the PMI report said.

The rate of increase softened, but remained elevated by historical standards. Cost pressures were linked by survey members to raw material scarcity and transportation problems.

“Charges levied by manufacturers rose as some firms shared part of their additional cost burdens with clients, although to a lesser degree than selling prices,” said Pollyanna De Lima, economics associate director at IHS Markit.

Naturally, this has weighed on business confidence of Indian manufacturers. The future output sub-index of the PMI fell to 55.7 in August, lower than emerging market peers. “The 12-month outlook for production remained positive, though confidence faded amid worries concerning the lasting scars of the pandemic and the adverse impact of rising costs on companies’ finances parallel to a lack of pricing power,” added Lima.