First, the good news. The manufacturing purchasing managers’ index (PMI), an important indicator of economic activity, rose slightly in April.
HSBC’s India manufacturing PMI rose to 54.9 in April from 54.7 in March. A reading of over 50 indicates expansion. However, output growth eased marginally (56.1 vs. 56.3 in March) on the back of power outages, remaining below its historical average, HSBC’s chief economist for India and ASEAN Leif Lybecker Eskesen pointed out in a statement.
Eskesen said while output growth eased marginally partly due to power shortages, a continued rise in new orders pulled up the composite index.
But on the inflation front, the news isn’t happy at all. PMI data show both input and output prices rose sharply due to higher raw material costs. “The persistent inflation pressures and lingering upside risks highlight the riskiness associated with RBI’s aggressive cut in April and the limited scope for further easing,” says Eskesen.
The improvement in the headline index was mostly driven by to a rise in new orders (61.1 vs. 58.1 in March), including a continued improvement in export orders (56.2 vs. 55.6 in March). Moreover, the growth rate of new orders is exceeding its historical average.
Backlogs of work (56.3 vs. 56.4 in March) rose further despite another sequential rise in employment (51.0 vs. 51.1 in March), while supplier delivery times remained broadly unchanged (50.2 vs. 48.8 in March) after increasing during the preceding months. Supplier timeliness could have improved had it not been for the power cuts, the statement said.
For the first time in more than three years, firms decreased their stock of purchases (49.1 vs. 53.5 in March), although by a modest scale. Purchasing activity grew at a slower clip, with quantity of purchases easing (57.1 vs. 58 in March). The deceleration was partly attributed to the high price of raw materials. Stocks of finished goods (51.4 vs. 51.8 in March) also grew at a marginally slower pace as power cuts led firms to meet orders by depleting stocks.
Of concern, input prices (64.8 vs. 61.2 in March) and output prices (58.7 vs. 54.1 in March) rose sharply as higher raw material costs were passed on to end-users. Some increases in costs were also due to higher indirect taxes.
What does the latest PMI reading mean for the overall economic situation, post-RBI’s aggressive 50 basis point rate cut in April?
Business conditions seem to have improved a bit and the increase in order flows from domestic and overseas customers suggest the pace of growth could hold up in the coming months barring unforeseen global economic problems, particularly in Europe.
But output growth continues to be constrained by tight capacity and supply bottlenecks as evident from the output impact from continuous power shortages.
“Moreover, tight capacity seems to prevail along the supply chain. In addition, high material costs also appear to have discouraged purchases somewhat and encouraged companies to maintain leaner inventories,” says Eskesen.
“Unfortunately, inflation pressures remain strong and the improvement in new business allowed firms to pass on cost increases, suggesting that they still have some pricing power. Moreover, tight capacity, the weak exchange rate, and the anticipated increase in administered diesel and electricity prices will keep inflation pressures elevated going forward,” he reckons.
Calling RBI’s rate cut “a bit premature and too aggressive”, he said if lingering inflation risks materialise it could hurt the RBI’s credibility and would, certainly, limit the scope for further rate cuts.
“Ultimately, the inflation-growth trade-off has to be improved through efforts to ease the policy paralysis and, associated with this, gain traction on supply side reforms. This could help improve the investment cycle relatively quickly and raise the potential output of the economy,” he said.