Bad news continued to pour in for the economy as manufacturing activity contracted to its lowest in over four-and-half years with both output and business orders dropping significantly in August.
The HSBC/Markit Purchasing Managers Index for the manufacturing industry stood at 48.5 in August down from 50.1 in July, indicating an overall contraction. The index hit its lowest since March 2009.
The survey showed factories cut production in August, with the sub-index measuring output falling to its lowest since early 2009. Manufacturers reported a fall in total orders for the third month in a row and at a faster pace in August, while new orders for exports shrank for the first time in a year.
“The weakness in growth was led by a decline in order flows from both domestic and foreign sources,” the HSBC report said.
The dismal PMI also led to the rupee depreciating 62 paise from its previous close, only to recover to end 32 paise weaker at 66.02 against the dollar.
Shubhada Rao, Chief Economist, YES Bank, said, “The PMI data suggest continued near-term pain in the manufacturing sector and possibility of further weakness in GDP growth in Q2 FY14.”
The weak data, coming on the heels of the first quarter economic growth hitting a dismal 4.4 per cent, prompted banks to predict that Asia's third-largest economy will grow this year even below the decade-low of 5 per cent. HSBC cut its growth forecast for the year to 4 per cent from its earlier 5.5 per cent forecast. On Friday, Nomura cut its GDP forecast to 4.2 per cent from 5 per cent earlier.
Slow growth
According to the HSBC report, growth is only likely to slow as the Reserve Bank of India will have to continue its liquidity-tightening measures leading to a jump in banks’ funding costs and heightened macroeconomic uncertainty. This will make consumers and businesses more cautious about spending, dampening domestic demand.
Rising long-term bond yields, declining equity prices, and capital outflows are not helping either. “These factors are expected to continue to weigh on growth in the coming months. We only expect to see faint signs of recovery during the final quarter of the fiscal year as macroeconomic uncertainty recedes and confidence reluctantly recovers,” the report said.
According to YES Bank’s Shubhada Rao, India’s structural challenges are likely to ease only gradually. “Mid-cycle tightening induced by external sector concerns and weak investment appetite are likely to keep growth prospects weak in the near term.”