<

India’s manufacturing growth steps on the brakes

HSBC India Manufacturing PMI 2013-04-08Enlarge Graph

The March manufacturing PMI showed that the sector slowed down considerably driven by power cuts and decreased orders.

The HSBC Purchasing Managers Index for India is now at 52, which represents a 16-month low. India has been suffering from high inflation, sluggish growth and a record account deficit, making it difficult for the country to recover.

Production constraints

India has an installed power generating capacity of approximately 10% below their actual demand, though in some cities, such as Chennai, the gap is close to 35% under-generation. Given the power outages, manufacturing output has been hurt significantly and this was weighed in the latest PMI.

New orders have also been affected given the weak growth and expectations of the economy in general. The high food and energy inflation has hurt demand as well, hitting consumer demand the hardest.

Inventories showed a decrease after having posted a minor expansion in February. Companies are drawing down inventories given the supply limitations due to power shortages as well as weak demand and future prospects.

Additionally, backlogs of work continue to accumulate, again due to power outages (since it prevents companies from catching up). This was also reflected by the increased supplier delivery times, which generally imply supply chain capacity tightness, but in this case is probably due to lack of production.

Minor improvements

HSBC India Manufacturing PMI Components 2013-04-11Enlarge Graph

Employment in manufacturing picked up slightly, at least showing that future outlook is not bad enough to start shedding employees.

Furthermore, inflation did ease significantly, though remains elevated. Also, despite the drop, output prices dropped slightly more than input prices, which may pressure margins. Nonetheless, the drop in inflation is more than needed.

Implications

The Reserve Bank of India (RBI) has limited ability to intervene. Cutting interest rates could boost growth, but would further fuel inflation.

Additionally, the slowdown is supply-led, not demand-led, meaning that the lack of basic infrastructure (e.g. power generation) has hindered the production and prevented it from meeting the existing business and consumer demand.

In the short and medium term, nothing may change materially in India. The change will come long term when the country invests in the necessary infrastructure to grow. Investors with holdings in Indian ETFs may want to sit down, because the wait will be long before growth picks up again.

Given that India seems to be touching bottom in the short term, long term investors, on the other hand, could position themselves to enter the market and hold.

The Realist Discussions