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Manufacturing PMI hits five-year high, may lift GDP growth to 7%

As PMI for December comes in at 54.7 and core sector growth hit 6.8% in November, economists see close to 7% GDP growth in December quarter

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A spike in the growth of eight core industries at 6.8% in November and a five-year high Nikkei Manufacturing purchasing managers' index (PMI) of 54.7 in December, albeit on a lower base, have infused enough optimism into economists to make them forecast a gross domestic product (GDP) growth of around 7% in the December quarter.

D K Srivastava, chief policy advisor, EY India, told DNA Money that with the return of buzz in factory activities, the third quarter of the current fiscal could see GDP growth pick up further to around 7% after it revived in September quarter with a 6.3% growth.

Prior to that, India's GDP growth had been declining for five straight quarters and hit a low of 5.7% in the June quarter, before turning around.

"The return of robust growth in core sector points to an upturn in industrial activities. Demand for manufactured products is picking, and therefore, it is quite likely that the third quarter GDP growth may be closer to 7%," said the EY economist.

Ranen Banerjee, partner and leader - public finance and economics, PwC India, who pegged the GDP growth for the last quarter of this calendar year at around the same level as Srivastava, said most indicators were pointing to a robust demand in the economy.

"When you look at sales of two-wheelers and four-wheelers in the rural sector, it looks like the demand has been good in December. The good performance of the stock markets also rubs on the demand sentiment. Demonetisation is behind us and fear of GST is also slowly dissipating. All these are feeding demand sentiment," Banerjee said.

The December manufacturing PMI number, compiled by IHS Markit, showed that operating conditions improved at the strongest rate in five years with the sharpest rise in output and new orders since December 2012 and October 2016, respectively.

This, according to the private survey, led to the quickest pace of job creation since August 2012 even as input cost inflation rose to highest level since April this year.

"Subsequently, firms raised their average selling prices at the fastest pace since February," said the statement issued by IHS Markit.

December's accelerated factory activities follows a manufacturing PMI of 52.6 in November. A PMI number above 50 denotes an expansion in factory activities and below 50 means contraction.

"This was consistent with the strongest improvement in the health of the (manufacturing) sector since December 2012. Notably, the PMI reading was slightly stronger than the average (54.0) recorded since the inception of the survey in March 2005. At the broad market group level, growth was recorded across all three monitored categories (consumer, intermediate and investment)," revealed the survey.

Apparently, the "new business inflows" were spurred by healthy demand from "home and international markets". "In turn, new export orders rose at the quickest pace since June".

According to the survey, its Future Output Index was "strongest in three months, (with) more than one-in-five participants forecasting higher production".

Still, it took a cautionary stance saying "the level of business confidence remained below the trend observed for the survey history".

Aashna Dodhia, economist at IHS Markit, said the PMI data showed that "overall upturn" in the manufacturing sector had set in with "expected improvement in market conditions over the next 12 months".

"Challenges remain as the economy adjusts to recent shocks, but the overall upturn was robust compared to the trend observed for the survey history. This outlook was shared by the manufacturing community as sentiment picked-up to the strongest in three months amid expected improvements in market conditions over the next 12 months," Dodhia said.

A GOOD START

  • PMI shows that operating conditions improved at the strongest rate in five years with the sharpest rise in output and new orders since December 2012 and October 2016, respectively
     
  • This, according to the survey, led to the quickest pace of job creation since August 2012 even as input cost inflation rose to highest level since April this year
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