Indian manufacturers are full of optimism. Business activity in the manufacturing sector moderated slightly in August, but encouraging data points kept the momentum going.
The seasonally adjusted S&P Global India Manufacturing Purchasing Managers Index (PMI) stood at 56.2, compared to 56.4 in July. A reading above 50 indicates expansion. A weak employment index pulled the headline down.
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Shilan Shah, India’s senior economist at Capital Economics, said the manufacturing PMI for August was unlikely to rise again after hitting a nine-month high in July.
The consensus estimate for the August headline PMI was 55, Shah pointed out in a September 1 note. Thus, the August reading has been better than expected.
Strong demand conditions aided new order intakes, pushing production growth to a nine-month high in August. The PMI report said that manufacturing firms attributed this to higher sales, recent efforts to increase capacity, less Covid restrictions and product diversification. In addition, delivery times have been shortened meaningfully, indicating that supply-side issues are no longer a major cause for concern.
Hence, a scenario of a soft landing or a moderate economic slowdown could be on the cards. “The recent firming up in headline PMI numbers suggests a soft landing in manufacturing growth is possible, despite Wednesday’s disastrous core IP data that showed activity hitting a brick wall at the start of the third quarter,” said Chief Emerging Asia Economist Miguel Chanco said. Pantheon Macroeconomics.
The easing of cost inflationary pressures is a much-needed relief. The index, which measures the input cost, fell to a one-year low in August as commodity prices, especially aluminum and steel, softened. Consequently, the gradual easing of inflation concerns gave a boost to business sentiment.
The Futures Output Index, a gauge of business confidence among manufacturers, rose to a six-year high of 64.8 in August. It had hit a 27-month low in June. “Strong sales forecasts, new inquiries and marketing efforts boosted confidence in August,” the PMI report said.
Ahead of the festive season, expectations are high among manufacturers in sectors such as automobiles and consumer durables. Obviously, manufacturers are gradually raising prices. The production price index rose to 52.7 from 52.6 in August, but remained below the recent high of 54.4 seen in May. Economists say the continuation of good business optimism will largely depend on the success of this year’s festive sales.
Gaura Sen Gupta, Indian Economist, IDFC First Bank said, “After a weak compared to the Gross Domestic Product (GDP) print for the upcoming June quarter, the upcoming festive season will be crucial from a growth perspective. The GDP data shows that The informal sector has yet to fully recover with the pick-up in contact-intensive ‘trade, hotel and transport’ services.” . Hence a ‘K-shaped’ recovery continues with the formal sector outperforming the informal sector, the urban sector outperforming the rural, and the larger firms performing better than the smaller firms.” The strong performance will give a much-needed boost to the informal sector and small firms.
Meanwhile, investors need to be aware of the risk of a global slowdown, given its impact on India’s manufacturing exports. The tightening of monetary policy by central banks to fight inflation has hit global demand. Commodity prices are calming down, but central banks are unlikely to stop in a hurry.
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