Manufacturing engine sees moderate slowdown

The seasonally adjusted S&P Global India Manufacturing PMI fell to 57.8 in June from 58.7 in May. A reading above 50 indicates expansion. This was the fallout of slight decrease in PMI sub-indices tracking new orders and output.

“Admittedly, the economy held up better than we had been expecting at the start of the year and PMI readings over recent months have suggested robust growth in the manufacturing sector. But today’s survey suggests that economic activity is slightly cooling," Thamashi De Silva, assistant India economist at Capital Economics, said.

While this moderation was largely being expected, the good news is that headline index is still in the expansion zone, signalling good demand. Plus, sub-indices measuring employment, order backlogs and inventories held well in June. Amid favourable domestic and export demand, Indian manufacturers saw a further improvement in their pricing power. In fact, the rate of charge inflation (selling price) was marked the strongest in 13 months and above its long-run average. In certain cases, the upturn was attributed to higher labour and input costs, said PMI survey report. Further, although average purchasing prices increased in June, rate of inflation was mild by historical standards and among lowest seen over past three years.

From a micro perspective, this gap between selling and cost prices bodes well for operating performance of manufacturers. “This indicates that margins of producers have likely widened in Q1FY24, supported by strong domestic demand," Gaura Sen Gupta, IDFC First Bank economist, said. From a macro perspective, this is positive for economic growth as gross value added by manufacturing sector could improve in Q1FY24, she said. But on the flip side, it indicates that seasonally adjusted core consumer price index inflation which moderated on a month-on-month basis in April and May, will not benefit much from fall in input cost pressure, Sen Gupta added.

And this could have some repercussions on Reserve Bank of India’s (RBI) monetary policy decisions. “Price pressures are building in Indian industry, based on this survey, suggesting that RBI’s pathway towards start of monetary easing is unlikely to be as smooth compared to its counterparts in ASEAN," Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, said. ASEAN is the Association of Southeast Asian Nations.

Meanwhile, as things stand, demand strength, new client enquiries and marketing efforts underpinned optimistic forecasts towards growth prospects, survey report said. Consequently, level of business confidence among Indian manufacturers rose to six-month high in June.

However, whether the moderation in the headline manufacturing PMI would continue is the key question.

It is worth noting here that while India’s export orders are also in the expansion zone, they rose at a slower pace in June. Given weak global demand and lower commodity prices, this is not very surprising, but needs monitoring.

“Looking ahead, we think that growth in manufacturing sector will continue to slow in coming months amidst tighter fiscal policy, the weak external backdrop and as higher policy rates continue to feed through to lending rates," De Silva added.

So, if this persists then India’s gross domestic product growth could be adversely impacted on a sequential basis.