The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) was 56.2 compared to 56.4 in July. A reading above 50 indicates expansion. Weak employment index dragged the headline reading lower.
The manufacturing PMI for August was unlikely to rise again, after surging to a nine-month high in July, said Shilan Shah, senior India economist at Capital Economics.
The consensus estimate for August’s headline PMI was 55, Shah pointed out in a note dated 1 September. As such, the August reading has held up better than most had expected.
Robust demand conditions aided new order intakes, pushing output growth to a nine-month high in August. Manufacturing firms attributed this to greater sales, recent efforts to enhance capacities, fewer covid restrictions, and product diversification, said the PMI report. Also, delivery times shortened meaningfully, indicating that supply-side issues are not a big cause of concern now.
Hence, a soft landing or a scenario of moderate economic slowdown could be on the cards. “The recent firmness in the headline PMI numbers suggests that a soft landing in manufacturing growth is possible, despite Wednesday’s disastrous core IP data, which showed activity hitting a brick wall at the start of Q3," said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.
The easing of cost inflation pressure is a much-needed relief. The index measuring input costs fell to a one-year low in August as commodity prices, especially aluminium and steel, moderated. Consequently, with concerns of inflation slowly fading, business sentiment got a boost.
The Future Output Index, a gauge of business confidence among manufacturers, hit a six-year high of 64.8 in August. In June, this had slid to a 27-month low. “Predictions of stronger sales, new enquiries and marketing efforts boosted confidence in August," the PMI report said.
In the run-up to the festive season, expectations are high among manufacturers in sectors such as automobile and consumer durables. Understandably, manufacturers are raising prices slowly. The Output Prices Index rose to 52.7 in August from 52.6, but remained below the recent high of 54.4 seen in May. Economists note that sustenance of elevated business optimism would largely depend on the success of this year’s festive sales.
“The upcoming festival season will be crucial from a growth perspective, after the weaker than expected June quarter gross domestic product (GDP) print," said Gaura Sen Gupta, India economist at IDFC First Bank. GDP data showed the informal sector is yet to fully recover with the pick-up in contact intensive ‘trade, hotels and transportation’ services lagging expectations. “A large part of the optimism being reflected in the PMI survey is strong formal sector recovery, which has been characteristic of the pandemic. The so-called ‘K-shaped’ recovery continues with the formal sector doing better than the informal sector, the urban sector outperforming rural, and large companies performing better than smaller firms," she said. A strong festival season performance will provide the much needed boost to the informal sector and smaller firms.
Meanwhile, investors need to be cognizant of the risk of a global slowdown, given its impact on India’s manufacturing exports. Monetary policy tightening by central banks to fight inflation has weighed on global demand. Commodity prices are cooling off, but central banks are unlikely to pause in a hurry.
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