The manufacturing sector slowed down marginally in July due to softness in new orders, but that did not impact job creation, private survey results released on Thursday showed. However, the sector faces inflation, the strongest in nearly 11 years.

The results, popularly known as the HSBC Purchasing Managers’ Index (PMI), dropped a tad to 58.1 in July, as against 58.3 in June. “India’s headline manufacturing PMI showed a marginal slowdown in the pace of expansion in July, but with most components remaining at robust levels, the small drop is no cause for concern. New export orders remain a bright spot, rising by 1 point to the second-highest level since early-2011,” Pranjul Bhandari, Chief India Economist at HSBC said. The index is prepared on the basis of responses from purchasing executives of 400 companies. Index above 50 shows expansion, while a sub-50 index indicates contraction.

The report accompanying the survey result said that companies continued to take on extra staff in July, with offers of both permanent and short-term contracts highlighted by anecdotal evidence. The latest increase in employment was softer than in June, though one of the strongest in the survey history. Yet, “while 7 per cent of panellists noted job creation, 92 per cent reported no change in headcounts,” it said.

With demand conditions remaining favourable and new orders coming in, goods producers purchased additional inputs in July. The rate of expansion was sharp, as more than a quarter of panellists lifted buying levels. In turn, strong input demand drove cost inflation higher. The overall rate of increase was marked and among the fastest in just under two years.

Manufacturers reported having paid more for coal, leather, packaging, paper, rubber and steel. Indian goods producers sought to protect margins from cost increases by raising selling prices. In addition to greater fees for raw materials, firms suggested that higher labour costs and demand strength had sparked an upward adjustment to output charges. The rate of inflation picked up to the fastest in just under 11 years, the report added. “The continuous increase in the output price index, driven by input and labour cost pressure, may signal further inflationary pressure in the economy,” Bhandari said.

While manufacturers again noted mild pressure on their operating capacities, evidenced by a marginal increase in backlogs, their suppliers were comfortably able to meet delivery deadlines. Input lead times shortened for the fifth straight month. Trends for stocks were mixed, as input inventories rose steeply and holdings of finished products fell further. Finally, “the overall level of positive sentiment towards the year-ahead outlook for production was broadly unchanged since June. Growth is expected to be supported by marketing efforts and new client enquiries,” the report said.

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