Amidst calls for a rate cut to boost investment and demand, manufacturing production contracted for the first time this year in July, according to a private survey.
The Nikkei India Manufacturing Purchasing Managers Index was at its lowest mark since February 2009 at 47.9 in July. It was much higher at 50.9 in June.
A reading above 50 on the index indicates expansion and one less than 50 denotes contraction.
“This highlighted the first deterioration in business conditions in 2017 so far. The downturn was widespread across the three broad areas of manufacturing, with intermediate goods producers the worst affected,” said Nikkei in a statement on Tuesday.
The Monetary Policy Committee led by Reserve Bank of India Governor Urjit Patel started its two-day meeting today and will make an announcement on benchmark rates on Wednesday.
In the second bi-monthly monetary policy review on June 6 and 7, the committee had left lending rates unchanged at 6.25 per cent while reducing the statutory liquidity ratio by 0.5 per cent.
But with retail inflation at a record low the government and industry is hoping for at least a 25 basis point cut in the repo rate.
“The weakening trend for demand, relatively muted cost inflationary pressures and discounted factory gate charges provide powerful tools for monetary policy easing, which has the potential to revive economic growth,” said Pollyanna De Lima, Principal Economist at IHS Markit and author of the report.
The survey revealed that incoming new work dropped for the first time in the year-to-date and at the steepest pace since early-2009, although new export orders continued to rise.
“Anecdotal evidence indicated that the Goods and Services Tax (GST) launch hampered demand,” it said.
Panellists were also not clear on tax rates under the GST, which caused confusion among suppliers and manufacturers themselves.
But the 12-month outlook for output remained positive in July, with companies expecting more clarity about GST to support growth.
Discouraged by the downturn in factory orders, companies lowered production in July. Higher tax rates also sparked greater cost burden in July. However, the pace at which input costs rose was moderate.