Too early to consider this a recovery, as PMI data usually contrast with industrial production data

Though industrial data for May remained bleak, HSBC’s Purchasing Managers Index (PMI) for manufacturing pointed to a slow, but consistent, improvement in factory output. The index rose to a four-month high of 55 points in June, compared with 54.8 points in May. This was primarily owing to expansion in production, along with an increased demand and new export orders.

It would, however, be too early to consider this a recovery in manufacturing, as PMI data usually contrast with Index of Industrial Production (IIP) data. This is because PMI uses a sample different from that used by IIP. Also, it tracks the sentiment based on surveys, rather than actual production numbers. For instance, PMI for manufacturing rose from 54.7 points in March to 54.9 points in April. However, the IIP during that month grew just 0.1 per cent.

Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives at about 500 manufacturing companies.

In the PMI, a reading of more than 50 points denotes expansion, while one below that number denotes contraction.

In March, the manufacturing PMI rose to 54.7 points, while the IIP contracted 3.5 per cent. The index of eight core industries grew just 3.8 per cent in May.

In June, firms recorded high demand, resulting in more new orders and expansion in output. There was a moderate rise in new export orders as well. This was in contrast to previous months, when output failed to keep up with demand, owing to power cuts.

Though power cuts remained a concern in June, a rise in workforce helped record higher output levels. “Employment expanding at a faster pace helped slow the pace of growth in backlogs,” said Leif Eskesen, chief economist (India & Asean), HSBC.

Input prices continued to rise for 39 successive months. The inflation for input products in June was sharp, and the highest since August 2011. This resulted in higher output prices, as manufacturers passed on high input costs to clients.

“Input and output prices rose at a faster pace than in May, keeping inflation high by historical standards. In light of these numbers, RBI (Reserve Bank of India) does not have a strong case for further rate cuts, as these would add to lingering inflation risks,” Eskesen said.

In the June 18 policy review, the central bank had kept key rates unchanged. Currently, RBI’s repo rate stands at eight per cent, while the cash reserve ratio is 4.75 per cent. Though wholesale price index-based inflation stood at 7.5per cent in May, consumer price index-based inflation was high at 10.36 per cent.

Source: Business Standard

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