Factory performance appears to have taken a small hit as the Nikkei India Manufacturing Purchasing Managers’ Index (PMI) slipped a tad to 51.2 in May from 51.6 in April.

The index is based on the survey conducted among purchasing executives in over 400 companies. The companies are divided into 8 broad categories: basic metals, chemicals & plastics, electrical & optical, food & drink, mechanical engineering, textiles & clothing, timber & paper and transport. An index over 50 shows expansion while below 50 means contraction.

According to the report prepared by IHS Markit, the latest survey data signalled a further, albeit weaker, improvement in Indian manufacturing conditions. This was reflected by weaker expansions in output and new orders and employment. Inflationary pressures intensified with both input and output prices rising at the fastest pace since February. Looking ahead, business optimism was weak by historical standards.

Commenting on the latest number, Aashna Dodhia, Economist at IHS Markit and author of the report, said that latest PMI survey signalled a further, albeit slower, improvement in the health of the manufacturing sector in May. This was reflective of weaker expansions in output, employment and new business. On the other hand, the gain in new orders from overseas markets was the strongest since February.

Inflationary pressures

“A build-up of inflationary pressures re-emerged with input cost and output charge inflation at the strongest since February, due to the upswing in global oil prices. As a net importer of crude oil, this could potentially destabilise India’s recovery, particularly in private consumption,” she said. At the same time, IHS anticipates that high oil prices will lead to a further depreciation of the Indian rupee and a wider current account deficit. “Subsequently, in efforts to contain inflation and maintain financial stability, it is likely that the RBI will raise interest rates over the summer,” she concluded.

The report also mentioned that the latest upturn signalled a marginal improvement in the health of the manufacturing sector. However, the rate of increase slowed to a modest pace. Greater production in consumption and intermediate groups continued to outweigh a decline in investment goods. In line with the trend for output, new orders placed at Indian manufacturing companies rose in May. Participating managers suggested that enhanced marketing initiatives supported new client wins.

Job data

However, the good news is on the employment front. The report said the latest data pointed to a sustained rise in Indian manufacturing staff numbers midway through the quarter. The rate of payroll growth was little-changed from April and marginal overall. According to anecdotal evidence, “firms were encouraged in expanding their capacity in response to greater production requirements. Job creation was evident in consumption and intermediate goods.”

It also mentioned that purchasing activity declined for the first time in seven months in May, albeit only fractionally. Meanwhile pre-production items held by Indian manufacturing companies rose at a slower pace. Stocks of finished goods, on the other hand, declined further in May. Despite easing from April’s survey record, the rate of contraction was sharp.

Higher input costs

Indian manufacturing companies faced higher input costs in May, thereby stretching the current sequence of inflation to 32 months. Participating managers commented on higher prices for raw materials such as oil and steel. Reflecting higher cost burdens, firms raised their selling prices in May. Businesses remained confident towards the 12- month outlook for output in May. An expected improvement in demand conditions boosted optimism, according to anecdotal evidence. That said, the respective index remained below the historical average.

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