India PMI Manufacturing Up at 3 Month High in July as Lockdowns Relaxes

Manufacturing activity in India rebounded to a three-month high in July after contracting in the previous month, a private sector survey showed on Monday

The IHS Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 55.3 in July from 48.1 in June, well above the 50-level separating growth from contraction. Factory activity in June had slipped into contraction for the first time in 11 months.

The PMI corroborated the upswing in other parameters of the economy. For example, goods and services tax collection in July stood at Rs 1.16 trillion, as against Rs 92,849 crore in June.

“It’s encouraging to see the Indian manufacturing industry recover from the blip seen in June. Output rose at a robust pace, with over one-third of companies noting a monthly expansion in production, amid a rebound in new business and the easing of some local Covid-19 restrictions,” said economics associate director at IHS Markit.

Factory orders rose amid reports of improved demand and the easing of restrictions. Strengthening international demand contributed to the uptick in total order books. New export orders expanded markedly in July, following a moderate contraction in June.

Economics associate director said if the pandemic continued to recede, a 9.7 percent annual increase in industrial production for the calendar year 2021 was expected. A marginal increase in employment ended a 15-month chain of job shedding.

“The PMI also brought the positive news of job creation in the manufacturing sector. Although marginal, the rise in employment was the first since the onset of Covid-19. With firms’ cost burdens continuing to rise, however, and signs of spare capacity still evident, it’s too early to say that such a trend will be sustained in the coming months.

Barclays Chief India Economist Rahul Bajoria said the employment PMI rose above 50 for the first time in 16 months, which might reflect positively for the services sector as well.

There was an increase in input costs. Output charges rose only slightly, however, as several companies absorbed additional cost burdens amid efforts to boost sales. However, the Reserve Bank of India is likely to maintain the status quo in its policy rate in this month’s policy review as inflationary pressures have begun to ease.

The policymakers would welcome evidence that inflationary pressures were starting to abate. Firms signaled the slowest increases in input costs and output charges for seven months.

“Hence, we expect the RBI to keep interest rates unchanged in its August meeting as it continues to support growth”

The Monetary Policy Committee (MPC) will hold its review meeting for three days from August 4.

Bajoria said while the input cost PMI fell slightly, it remained high and a similar trend was seen in output prices. This may reflect the recent leveling off in the prices of several commodities, he said. “However, as activity levels continue to improve, we expect producers to move to improve their margins by closing the gap between input and output costs,” Bajoria said.

“While inflation threats remain, we expect the RBI to continue to prioritize growth and maintain an accommodative posture in the monetary policy meeting this week,” he said.

Respondents to the survey foresee output growth in the year ahead, with the end of the pandemic and rising sales expected to support the upturn. The overall level of positive sentiment rose from June’s 11-month low but remained historically subdued as some companies were concerned about the path of the pandemic.

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