Manufacturing PMI dips slightly but prospects still bright

Though the Purchasing Managers' Index (PMI) for March has declined to 54.7 points from the January peak of 57.5, growth prospects remain intact.

Surveying purchasing executives in over 500 manufacturing companies in India, the PMI captures the trends in parameters such as new order flows, stocks of items purchased, input/output costs, backlogs of work, employment levels and suppliers' delivery times. The index touched a nine-month high in January, hinting that India was back on the high growth path after a period of slowdown. But the PMI has shown successive declines in February (56.6 points) and March. However, the latest numbers don't imply a weakening demand for industrial goods.

First, the survey points to new business orders increasing since last December. This is also evident from the increasing backlog of work. Export orders too remain strong. The PMI has contracted only because of constraints such as power cuts and raw material shortages.

Hence, while the demand has been robust, infrastructure bottlenecks have prevented the companies from taking full advantage of this.

In fact, the slowdown in demand seen last year has gradually been wearing off from as early as October 2011. Backlog of work has actually been increasing since October 2011. This increase in backlog also coincided with the rebounding of the PMI above the 50 points mark in October, indicating brightening business prospects. Earlier, from a high of 58 points in April 2011, the PMI had steadily deteriorated to 50 points in September 2011. (50 points is the line that differentiates expansion (>50) from contraction (<50).)

Labour shortage has not led to the work backlog.

The last three months have seen employment in the manufacturing sector go up, putting an end to the period of job losses seen in 2011. This implies that companies have responded to improving output requirements.

In such a scenario, an easing of constraints mentioned above would just be what the doctor ordered to boost growth.

Easing cost pressures

Besides, the March PMI survey points to a possible easing of cost pressures. The rise in input costs in March was the slowest in the last one-and a half years.

Consequently, the rate at which this rise was passed on to the customers by the companies has also touched a 16-month low in March. This implies that inflation at last is showing signs of being reined in.

Although it is too early, a continuation of this trend could prompt the RBI to cut interest rates and further encourage growth.

>vardhini.c@thehindu.co.in

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