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Why Manufacturing Activity in India Fell in June 2017

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Manufacturing activity in June 2017

Uncertainty related to India’s new goods and services tax (or GST), which was implemented on July 1, 2017, seemed to affect India’s (INDA) manufacturing activity in June 2017. The manufacturing PMI (purchasing managers’ index) in India (INDY) fell to 50.9 in June, compared to 51.6 in May. The manufacturing sector saw its weakest growth in June over the last four months due to softer expansion in new order work.

The implementation of GST is expected to improve the performance of the manufacturing sector in India (EPI) in the long term. The new simplified tax system with GST has replaced the old multilayered tax system, and the change is expected to reduce production costs due to the reduced tax rate.

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Slower growth in output in June 2017

India’s (PIN) service sector output rose more slowly in June 2017 as growth in orderbooks fell compared to May. Total work order growth also eased to a four-month low, particularly in the intermediate goods category. New work orders for the consumer goods category continued to rise in June, and capital goods recovered from their contraction in May.

According to a July 2017 Markit report, severe economic conditions, water shortages, and the implementation of GST seem to have affected manufacturing activity in June 2017.

Employment and price pressures

Employment and purchasing activity in the service sector in India (EEM) increased at a slower rate in June 2017. New work orders from global markets rose sharply in June, compared to the previous eight months. Pricing pressures remained low in June as input and output costs rose more slowly in June than they did in May.

Expectations

Manufacturers in India (IEMG) continue to be optimistic about output growth over the next year. New product launches and expectations of higher demand due to lower tax rates are expected to improve activity in the manufacturing sector in 2017.

However, the confidence level in the sector fell to a three-month low due to the uncertainty related to the implementation of GST. The iShares MSCI India ETF (INDA), which tracks Indian equities, had risen ~6% in July on July 25, 2017.

Let’s look at India’s service sector activity in our next article.

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