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Manufacturing to rebound soon, say economists

Thursday, 6 December 2012 - 3:00am IST | Place: Mumbai | Agency: dna

Signs are aplenty that manufacturing activity will likely pick up in the coming months, say economists.

They point to fall in existing inventory levels, higher demand for Indian goods from both domestic and foreign markets and better liquidity conditions as sure signs that India's manufacturing has bottomed out.

“We do not expect a sharp acceleration in final demand, but with inventories near a record low, restocking demand may boost manufacturing output in the coming months as supply-side issues are addressed,” said Sonal Varma and Aman Mohunta, economists at Nomura.

They point out that the finished goods inventory level had dropped to a 45-month low of 45.3 in November from 48.3 in October, the second-lowest reading in the history of the series. The lowest reading occurred during the financial crisis in February 2009.

India’s overall manufacturing purchasing managers' index (PMI) had climbed in November to 53.7 from 52.9 in October. HSBC Global Research, which maintains the PMI, noted that orders from both domestic and external sources had boosted the activity in the manufacturing sector.

“A nascent recovery in domestic investments and stabilisation in external demand are likely behind the increase in order flows,” said HSBC in the PMI report.

In order to meet the high festive demand in October-November, firms had to resort to using up existing inventory since issues like power and labour shortage affected production. As a result, the order-inventory ratio rose to a 20-month high of 1.23 in November, according to Nomura.

Tushar Poddar, chief India economist at Goldman Sachs, believes that manufacturing will pick up on better liquidity conditions, stable business confidence and stable input prices. “We are at the trough of the cycle. We are looking at some pick-up in manufacturing in the first half but only a substantial pick-up in the second half of 2013.”

Goldman Sachs expects the Reserve Bank of India to cut policy rates by 50 basis points in 2013 since elevated core inflation will prevent aggressive easing.

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