Manufacturing activity in the country fell to the lowest level in four-and-a-half years in August, in the strongest confirmation yet that the economy is in the throes of a slowdown.
The HSBC India Manufacturing Purchasing Managers’ Index (PMI) fell to 48.5 in August from 50.1 in July. This was the first sub-50.0 reading since March 2009.
The index indicates an overall increase if it reads above 50 and overall decrease if it falls below 50.
In July, the services PMI, too, had contracted to 47.9 from 51.7 the previous month, with the composite PMI falling to 48.4 in July from 50.9 in June.
New orders fell, especially for exporters, Monday’s data showed. The rate of contraction in new orders was the fastest since February 2009. While orders for intermediate goods fell sharply, consumer goods producers registered a slight decline.
Export orders snapped the 11-month growing trend as competitive pressures increased and demand from key clients weakened. “Together with a drawdown in finished goods inventories, this led to a drop in output,” said Leif Eskesen, chief economist for India & Asean at HSBC.
Manufacturing output was lower at both investment and intermediate goods firms with the latter recording sharper decline.
Stocks of finished goods decreased for the first time since March, though the fall was moderate.
After growing for over four years, input buying also decreased in August due to fall in demand. According to HSBC, the fall was across the sub-sectors. Pre-production stocks also fell the sharpest in almost five years.
What’s worse, vendor performance continued to deteriorate as firms grappled with raw material shortages and were reluctant to import them as the rupee made fresh lows each day.
In August, the rupee lost 9% against the greenback due to foreign fund outflows. The monthly loss was the biggest since March 1992.
According to the Securities & Exchange Board of India, foreign institutional investors net-sold $2.5 billion in Indian equity and debt markets.
The weaker rupee also drove input prices up though cost inflation eased compared with July. Manufacturers increased their selling prices in order to pass on the increased cost burden, while competition kept the rate of price rise in check.
“With the currency continuing to weaken, the lower pass-through to output prices reflects weak demand and suggests that margins are under pressure,” said Sonal Varma, India economist at Nomura.
Overall, the PMI has averaged 49.3 so far in July-August, compared with 50.5 in the second quarter, suggesting demand weakened further in third quarter, she said.
Despite such conditions, Indian manufacturers continued to hire new workforce in August. However, the rates of job creation were slight across the sector.
Economists feel this may not be enough to convince the central bank to loosen the noose on liquidity, particularly given the rupee’s weakness.
“Combined with the heightened macroeconomic uncertainty, this will continue to weigh on growth in coming months,” said Eskesen.
Since mid-July, when the rupee went into a spiral, the RBI has tightened short-term liquidity, making money costlier for punting in the currency market. A slew of other measures were also announced to contain the rupee depreciation.
Growth is expected to take a further beating unless these curbs are lifted, and soon.