The sharp fall in Nikkei India Purchasing Managers Index (PMI) in December to 49.1 from 50.3 in November was also among the major reasons that spooked the local stock markets on Monday besides the Chinese market crash.
PMI is a widely tracked index that assesses the monthly feedbacks from companies on new orders and factory production trends. If the index falls below 50, it implies a contraction in manufacturing activity. This time, the contraction has come for the first time in two years and at the sharpest rate in almost seven years or since the time of the 2008 global financial meltdown.
One can partly blame the Chennai floods for the contraction in manufacturing and falling new orders. According to Amit Kumar Sarkar, Partner and Leader-Indirect taxes at Grant Thornton India LLP, about 40 per cent of the country’s manufacturing is based in South India, of which 15 per cent comes from Chennai. If the plants are shut there (as was the case recently due to floods), it impacts the overall manufacturing basket.
But, that isn’t the whole problem.
There has been a visible slowdown in the manufacturing sector in the recent months except in the consumer-related segments. If one looks at the recently released core sector data, the sharp fall is visible. The growth in eight core sector industries, which constitute close to 40 per cent of the total factory output, contracted by 1.3 per cent, indicating slowing production across segments. This would mean that the November Index of Industrial Production (IIP) numbers, set to be released soon would take a hit.
The October IIP numbers were largely a one-time wonder when it showed a sudden surge in factory output to 9.8 per cent in October compared with a growth of 3.6 per cent in the preceding month. But, this was primarily aided by a 42.2 per cent growth in the consumer durables during the festive season (in the month before that this segment had grown only by 8.4 percent). Similarly, the consumer goods too had grown by sharp 18.4 percent.
But, as Firstpost noted then, the festival season demand that contributed to the October surge in manufacturing could not have been sustainable as seen in the previous years. Adding to the worries of the industries is a depreciating rupee resulting in a spike in both input and output costs. The pressure on rupee will stay since there are expectations of further doses of rate hikes by the US Federal Reserve going ahead.
What is even more worrying is a recent resurgence seen in inflation. The consumer price inflation has shown uptick in the recent months. A depreciating currency adds to the problem since it is inflationary. Continuing rise in inflation, coupled with persisting stress in the corporate sector and manufacturing, could complicate the macro economic scenario for the government and the Reserve Bank of India (RBI), forcing it to postpone the future rate cuts, which will in turn keep the interest cost relatively high in the bank loan market.
Already, economists in general are confused with the actual growth scenario despite the government's assurances. The government has already scaled down the growth forecast from 8-8.1 per cent to 7-7.5 per cent. A painful slowdown in exports and tepid domestic demand continue to pose big challenges for growth. Besides the factors pertaining to general economy, the slow pace of reforms progress too has dented sentiment of investors. Large-ticket reforms, including the crucial Goods and Services Tax, are yet to happen in the economy mainly on account of political deadlocks. This is where prime minister Narendra Modi’s big challenge lies.
As for the December PMI numbers, there is a danger in arriving at quick conclusions. One should watch the PMI numbers over a period of time and should not press the panic button as yet.
A clearer picture on the manufacturing growth scenario will emerge over the next few months when the November-December factory output numbers and PMI trends emerge.
(Data from Kishor Kadam)