India's Manufacturing Sector Turning Around?

Mon, 7 Nov Pre-Open

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PMI or Purchasing Managers' Index is an indicator of the economic health of the manufacturing sector. The PMI is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Nikkei India Composite PMI Output Index, a gauge of private sector activity in the country, reached its highest level last month since January 2013 and rose to a 22-month peak in October of 54.4 against 52.1 in September 2016.

An index reading above 50 reflects expansion; a marking below it points to contraction.

A Nikkei release on Tuesday attributed the good performance to stronger contributions from three of its five sub-components: new orders, output and stocks of purchases.

As per the news release, consumer goods producers outperformed their intermediate and investment goods counterparts, registering stronger rates of expansion for both output and new orders. In October, output increased for the tenth straight month and at the quickest rate in nearly four years. Survey respondents attributed the latest rise in production to strong growth of new orders.

The average price of inputs rose markedly during October, with the rate of inflation quickening to the fastest since August 2014. Survey participants reported higher prices across a wide range of goods, but particularly highlighted steel, plastic and petrol.

Companies also attempted to offset the effects of marked input cost inflation by purchasing and storing a greater level of pre-production items. Buying levels grew at the strongest rate in 14 months, while stock levels increased at the fastest pace since July 2015.

Pollyanna De Lima, Economist at IHS Markit said: The sector looks to be building on the foundation of the implied pick-up in growth in the previous quarter. Supporting this was the RBI's MPC announcement of a further 25 basis-point reduction in its policy rate to 6.25%. The extended easing cycle, however, brought upside risks to inflation, with manufacturers seeing purchase costs rising at the quickest pace in over two years. Part of the increase in cost burdens was passed on to consumers by way of higher selling prices, which is likely to continue on an upward trend as we head towards the year end.

The boost in the PMI seems to be an indication that the economy is finally turning the corner. Good monsoons and an uptick in consumption have also helped the economy. It would be critical that the trend in rising PMIs is sustained, it would signal a turnaround for both investment demand and for employment.

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