Manufacturing output shrinks first time in two years

The contraction in the December manufacturing Purchasing Managers' Index (PMI) number below 50 revealed the underlying stress in the sector despite the fact that Chennai floods could have been largely responsible for it.

The Nikkei India Manufacturing PMI, a composite monthly indicator of manufacturing performance, slipped to 49.1 in December from 50.3 last month.

A figure below 50 indicates contraction and anything above it would mean expansion in manufacturing. Last month, the PMI dropped below 50 for the first time since October 2013.

D K Srivastava, chief economic advisor at EY India, said the contraction in manufacturing PMI was a confirmation of the stress in the economy, which is likely to continue in coming times too.

"The stress has been there for some time. It (manufacturing PMI) is a confirmation of that stress. It is going to continue for some time. The stress is mainly because of extremely sluggish export demand as well as extremely weak domestic investment demand," he said.

Srivastava said it was being held up by just consumer goods sector.

"Otherwise both our exports and investment demand in the economy remains weak and this is a confirmation that we are not going to get out of this situation," he said.

According to him, Chennai floods was only a temporary reason and that it was more due to "underlying phenomenon" that the PMI had shrunk.

"I don't think it can be because of such temporary reason (as Chennai). It is more an underlying phenomenon, which basically arises from weakness of global growth," he said.

The EY economist expected the GDP growth, which has already been snipped to 7-7.5% from the earlier 8.1-8.5% by the government, to be further revised downwards by a "small margin".

"That is more or less definite that these trends coupled with an extremely weak crude prices and primary metal prices, which are leading to very low negative inflation are price deflator of GDP in near terms. This means nominal GDP growth would continue to possibly fall and this is going to have significant adverse impact on indirect tax revenues," he said.

Srivastava said the direct implication a shrinking manufacturing PMI will result in posing a formidable challenge for the government to meet its fiscal consolidation targets for the current (3.9% of the GDP) and the next (3.5% of the GDP) fiscal.

Amit Kumar Sarkar, partner and leader – indirect tax, Grant Thornton India LLP, had a slightly different view on it.

He said even though the index had shrunk, there have been pay-outs to the labour, which meant it was a "temporary blip".

"It may mean that it is just a temporary blip and that manufacturing is planning to kick start again," he said.

The second reason, he gave to back his argument, was that cyclone in Chennai had led to shut down of large manufacturing plant for more than 15 days that could have artificially suppressed the PMI in December.

Sarkar said 40% of India's manufacturing was based in South India, with Chennai constituting for 15% of it.

"So, if 15% of the South Indian production goes away. You are looking at 6% degrowth immediately happening against the nation," he said.

Major automobile companies like Hyundai, Ford, Renault, AshoK Leyland and others have their manufacturing units in Tamil Nadu.

"Today, India's 30% automobile capacity is in that state, which got affected. This has got reflected in manufacturing number of December," he said.

Sarkar said the real trend would emerge after the next few months are out.