Business activity in India’s manufacturing sector saw a marginal improvement in February. The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) rose to 54.9 from 54 in January, aided by modest rise in the new orders component as the impact of Omicron on demand conditions faded.
A reading above 50 indicates expansion. For the eighth month in a row, the headline figure has remained in the expansion zone and above its long-run average of 53.6. But the good news ends here. A closer look at the sub-indices data does not paint a bright picture for the sector’s outlook.
For instance, the survey for February showed a further increase in average input costs faced by Indian manufacturers. Even though the input price index softened to a six-month low, it remained above the historical average.
“The fact that new covid infections in India remain low bodes well for the manufacturing outlook. But there are headwinds," said Darren Aw, Asia economist at Capital Economics Ltd.
“For a start, today’s data also show that the supplier delivery times index remained below 50 for the 12th consecutive month in February. This suggests that delivery times are still lengthening. And the Russia-Ukraine war has added to downside risks," he said in a report on 2 March.
It should be noted that the ongoing Russia-Ukraine conflict has pushed Brent crude oil price to over $110/barrel. At a time when cost inflation is already elevated, a further increase dampens the prospects of the manufacturing sector, which relies on crude-based raw materials, too.
What’s more, the confidence to meaningfully pass on the burden of increased costs is still missing among Indian manufacturers. The output price sub-index of PMI fell back to 51 from 51.7 in January.
However, according to Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, the outlook for inflation remains hot. He feels that companies have been sitting on substantial increases in costs over the past 18 months and are unlikely to continue to be that way. He expects manufacturers to raise their selling prices further.
However, unless companies significantly hike prices, their profit margins would remain under pressure.
All these factors have kept manufacturers’ degree of optimism regarding business outlook below its long-run average. The future output index for India at 57.3 [see chart] is lowest compared with the future output index readings of global manufacturing, emerging markets and Asean PMIs. Asean is short for Association of Southeast Asian Nations.
