Slow growth in factory output and order flows in December

The manufacturing sector decelerated marginally in December due to slower growth in output and order flows, an HSBC survey said.

The HSBC India Manufacturing Purchasing Managers Index (PMI) — a measure of factory production — fell to 50.7 in December from 51.3 in November. This pulled down key stock indices and along with weak European cues put brakes on the buying spree in the stock market.

Market down

The Sensex lost over 480 points from the day’s high before closing at 20880 on Thursday. This was 252 points lower than Wednesday’s closing. The Nifty shed 147 points from the day’s high before settling at 6211, with a loss of nearly 80 points over the previous closing.

“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 growth in output in December was 51.3 versus 51.5 in November and new orders were at 51.3 against 51.9 in November. However, the quarterly (October-December) index rose to 50.5 from 49.4 during the corresponding period of 2012.

According to the survey, the good news was that both input (57.8 versus 58.0 in November) and output price (51.8 versus 51.9 in November) inflation moderated further, albeit only marginally. The surveyed firms pointed out that the prices of a range of raw materials, including metals, chemicals and textiles, had increased.

On factors holding back domestic demand, the survey listed 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.

Inflation easing

Giving out the positives, the survey said there are signs that inflation pressures may be easing. The strengthening of the exchange rate since August has helped reduce imported inflation and weak domestic demand is also a contributing factor. The improvement in food supplies should also help contain inflation in the near term, the survey added. It also said that the Indian manufacturing sector ended 2013 on an encouraging note. Operating conditions improved for the second successive month in December, as both output and new orders increased. Consequently, firms raised their workforce in December, it said.

However, sticky inflation expectations and a need for further adjustment in fuel prices will keep inflation elevated.

(This article was published on January 2, 2014)
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