Reflecting the slowdown in the economy, the results of a private survey presented a dismal picture of the manufacturing sector on Monday. Manufacturing has a 17 per cent share in GDP (Gross Domestic Product).

The survey, known as the Manufacturing Purchasing Sectors’ Index (PMI), is conducted by IHS Markit. It slipped to 51.4 in August from 52.5 in July. Though still in expansion mode, the index has fallen to its lowest since May 2018. This index is prepared on the basis of a survey which is conducted among purchasing executives in over 400 companies. These companies are divided into eight broad categories: basic metals, chemicals and plastics, electrical and optical, food and drink, mechanical engineering, textiles clothing, timber and paper, and transport.

An index of over 50 shows expansion, while an index below 50 means contraction. The index is prepared by IHS Markit and released along with a detailed report. This index is widely quoted to explain the latest industrial situation.

The PMI Survey report has been released three days after it was announced that GDP growth dropped to a 25-quarter low of 5 per cent during the April-June quarter (first quarter) of fiscal 2019-20.

At the same time, auto sales remained in reverse gear during August, when companies' domestic sales dropped by up to half when compared to sales during the same month last year. All these make a strong case for fiscal stimulus by the Government, apart from a policy rate reduction by the Monetary Policy Committee (MPC).

Read also: August anguish: Auto sales skid further

Commenting on the latest survey results, Pollyanna de Lima, Principal Economist at IHS Markit, said August saw an undesirable combination of slowing economic growth and greater cost inflationary pressures in the Indian manufacturing industry. Most PMI indices moved lower, including key health-check measures for new orders, output and employment. In the former two cases, rates of expansion were particularly weak when one looks at the survey history.

"Another worrying sign was the first drop in input buying for 15 months, which reflected a mixture of intentional reductions in stocks and shortages of available finance. Until manufacturers are willing to loosen the purse strings, it is difficult to foresee a meaningful rebound in production growth on the horizon. Another factor restricting quantities of purchases was a pick-up in the rate of increase in input prices. While not alarming, the acceleration in cost inflation may restrict central bank stimulus to the economy in the near-term," she said,

The report accompanying the index said although economic growth in the Indian manufacturing industry was sustained in August, most survey indicators fell since July to signal a widespread loss of momentum. With sales expanding at the slowest rate in 15 months, production growth and job creation were tamed, while factories lowered input buying for the first time since May 2018. One survey indicator that moved up was the measure of input costs. Inflation accelerated to a nine-month high, though it remained moderate and below its long-run average. The only other upward movement was seen for business confidence, which strengthened to a 16-month high.

Firms that noted sales growth commented on successful marketing and the receipt of orders in bulk. Anecdotal evidence indicated that competitive pressures and challenging market conditions restricted the upturn. New orders from overseas also increased at a slower rate in August, with growth the weakest seen since April 2018. Subdued sales to domestic and international clients in turn curbed output growth, which softened to the weakest in a year.

Some survey members also reported cash-flow problems and a lack of available finance. Despite remaining in expansion, employment rose only marginally, and to a lesser extent than in July. Some panelists indicated that weak sales prevented them from replacing retirees and voluntary leavers. 

Also read: Is the slowdown cyclical or structural?

 

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