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Manufacturing hits a bump in August: PMI

Growth in the country’s manufacturing activities slowed down a bit in August due to higher base in the previous month, showed the widely tracked HSBC purchasing managers’ index (PMI). 

Employment was down marginally for the second consecutive month in August, while price pressures remained high which may not allow the Reserve Bank of India to cut the policy rate. 

PMI dipped slightly from July’s 17-month high of 53 points to 52.4 in August. Reading above 50 points shows expansion and August was the tenth consecutive month when manufacturing grew.

“Manufacturing activity moderated following a spurt in the previous month,” Frederic Neumann, Co-Head of Asian Economic Research at HSBC said. 

The data came a few days after official figures showed that manufacturing rose 3.5% in April-June, 2014-15, after two quarters of continuous decline. The gross domestic product grew 5.7% against 4.6% in the previous quarter. 

Even as growth in manufacturing moderated in August, the activities remained solid, said Markit Economics, a financial information firm which compiles PMI data. PMI is based on a survey of over 500 private sector firms.

Among the monitored sub-sectors, the best performing was consumer goods, while business conditions deteriorated in the capital goods category. Here PMI differs from the official data. The Index of Industrial Production, an official measure, showed that capital goods production surged 13.9% in April-June, 2014-15 against a decline of 2.1% in consumer goods. 

The PMI data showed that output at manufacturing companies rose for a tenth straight month in August, and at the second sharpest rate since February 2013. 

Anecdotal evidence linked expansions in production to improved order book volumes. New orders increased for a tenth month in succession. 

Similarly, new export orders rose in August, extending the current sequence of growth to 11 months. Surveyed firms pointed to strengthening demand from key export clients as the main reason behind expansions in foreign business.

According to official figures, July export growth came down to 7.33% against the two previous months of double-digit expansion. August figures will come later this month. 

Meanwhile, input stocks and post-production inventories held by Indian manufacturers grew in August. Panellists indicated that stocks were increased in order to respond to expansions in new orders. Stocks of purchases and finished goods increased in two of the three surveyed categories, with the exception being investment goods.

“The mood remains positive too, with firms accumulating inventory in response to stronger demand,” Neumann said.

Conversely, workforce numbers declined for a second successive month in August, albeit at a fractional rate as the vast majority of survey respondents left employment unchanged.

Meanwhile, higher prices paid for raw materials meant that input costs rose strongly in August. That said, the rate of cost inflation slowed from July. Factory gate prices also increased during the month.

“Price pressures remained elevated, despite the slight deceleration seen in input prices. This is likely to keep the central bank guarded against inflation risks, particularly from the pick-up in demand,” Neumann said. 

Despite pressures from many quarters, RBI has not cut the policy rates as it thinks that its target to bring the retail price inflation down to 6% by 2016 from close to 8% in July this year faces current faces upside risks.

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