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Wilting local, global demand hits factory activity in March

by FP Staff  Apr 2, 2013 05:00 IST

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BANGALORE (Reuters) - Cooling domestic and foreign demand dragged on Indian manufacturing growth in March, with the sector expanding at its slowest pace since November 2011, a business survey showed on Monday.

The HSBC manufacturing Purchasing Managers' Index (PMI), which gauges business activity in Indian factories but not its utilities, fell to 52.0 in March, after a surge to 54.2 in February.

The PMI has held above 50 - the level that divides growth and contraction - for four years, but the March headline reading was the biggest month-on-month drop since September 2011.

"Manufacturing activity lost momentum in March, with output growth slowing notably on the back of a deceleration in new orders," said Leif Eskesen, economist at HSBC.

Electricity outages across India over the last month also crimped factory production, Eskesen said.

The new orders index fell from 56.3 in February to 52.8, the weakest pace of growth since November 2011. In turn, overall output grew at its weakest pace in more than a year.

Growth in new export orders also cooled to its lowest level since November 2011, reflecting the deepening global economic fallout from Europe's three-year sovereign debt crisis.

That is a disappointing signal for an economy with a wide current account deficit that hit a record high at 6.7 percent of gross domestic product in the December quarter.

However, most recent official data showed India's industrial output grew an annual 2.4 percent in January as merchandise exports snapped a falling trend. Exports grew for the second straight month in February.

The HSBC Markit survey also showed input and output prices rose at a slower pace during the month, suggesting India's inflation rate will ease over coming months after picking up slightly to 6.84 percent in February,

"Encouragingly, input and output price inflation eased. Even so, the scope for further monetary policy easing remains limited," added Eskesen.

The Reserve Bank of India, facing intense pressure from industry and government to loosen monetary conditions to arrest the worst economic slowdown in a decade, has cut its key lending rate twice so far this year by 25 basis points each to 7.50 percent after leaving it on hold for nine months.

However, the central bank warned the prospect of further monetary easing is limited.

A recent uptick in headline inflation and a record-high current account deficit limit the RBI's space for monetary easing despite pressure from a government facing elections in 2014.

(Editing by Kim Coghill)

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