uploads/2013/06/HSBC-India-Manfacturing-PMI-2013-06-06.jpg

India on the verge of contraction

By

Updated

The PMI hits 50.1, the lowest point in 50 months

The Purchasing Managers Index is a useful gauge of the confidence in the manufacturing sector. Since the sector is sensitive to consumer demand and pricing dynamics, it can give insight about the broader economy as well.

India’s economy has been disappointed for several months now, and given the high inflation, the government is unable to use monetary policy to attempt to remediate the situation.

Additionally, India has been faced with other problems that compound the low growth caused by lower global demand.

The elimination of a government subsidy on fuel prices patched government finances but unleashed double-digit inflation in energy and food. Power outages and water shortages continue to hinder productivity, which prevents manufacturers from meeting the existing demand in the country.

Overall, under-investment in infrastructure contributes to the logistics inefficiency that reduces in-country and global trade

PMI at the edge of the cliff

The 50.1 reading from May is the lowest value in 50 months; a reading below 50 means the economy is expected to contract. At 50.1, the difference versus 49.9 is merely symbolical.

Article continues below advertisement

The main component of the PMI, the output index, fell below 50 for the first time since March 2009. The drop in production, though, was driven by power cuts and water outages that prevented producers from fulfilling demand. A reflection of this was the slight increase in the orderbook (slowest in 50 months) as well as the sharp increase in the work backlog (fastest in five months).

Inflation remains a concern as usual, with input prices increasing and prices charged dropping for the first time in four years. This may squeeze margins significantly if sustained. Much of the price drop was due to producers lowering price in reaction to much higher competition in the local market.

International markets actually saw an increase in the orders which was the fastest since January. This is in line with what has been observed from PMIs from other countries such as China and Brazil.

Leif Eskesen, HSBC’s Chief Economist for India & ASEAN, said:

“Economic activity in the manufacturing sector slowed further in May as output contracted in response to softer domestic orders. […] These numbers have heightened the probability that the RBI will fire another salvo at its June policy meeting.”

Advertisement

More From Market Realist