Even as the Purchasing Manager Index fell in December, it is still in the expansionary mode, a HSBC survey said on Thursday.

The index was down to 50.7 in December as against 51.3 in November. It was down due to slower growth in output (51.3 vs. 51.5 in November) and new orders (51.3 vs. 51.9 in November) during the month. However, the quarterly (October-December) index rose to 50.5 from 49.4 during corresponding period of 2012.

Growth still moderate

“Today's numbers show that growth remains moderate and struggles to take off due to lingering structural constraints. Even so, inflation pressures remain firm and are proving sticky. The RBI may yet again have to flex its muscles and tighten monetary policy to bring down the elevated level of inflation,” Leif Eskesen, Chief Economist for India & ASEAN at HSBC, said.

The survey has listed good news as both input (57.8 vs. 58.0 in November) and output price (51.8 vs. 51.9 in November) inflation moderated further, albeit only marginally. Even so, surveyed firms noted that a range of raw materials had increased in price, including metals, chemicals and textiles.

Why demand is stagnant

In answer to question on what is holding back domestic demand, the survey listed several factors such as elevated and persistent inflation, tighter financial conditions and high leverage, and insufficient progress on structural reform implementation as well as slow execution of key investment projects.

Inflating easing?

On the bright side, there are signs that inflation pressures may be easing. The strengthening of the exchange rate since August has helped reduce imported inflation; weak domestic demand has also lent support. The improvement in food supplies should also help contain inflation pressures near term, the survey added.

However, sticky inflation expectations and a need for further adjustment in fuel prices will keep inflation elevated. Moreover, “there is a big structural component to inflation that will not reduce before we have more notable progress on economic reforms and de-bottlenecking,” it mentioned.

shishir.s@thehindu.co.in

(This article was published on January 2, 2014)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.