The message from the ABN Amro Purchasing Managers’ manufacturing index in January was that industry was contracting, but at a slower pace, and there was a faint hope it would bottom out soon. Unfortunately, the seasonally adjusted Purchasing Managers’ Index (PMI) numbers for February don’t bear out the optimism.
Not only did manufacturing continue to shrink, there was also no appreciable change in the rate—PMI was 47 in February, compared with 46.7 in January. Any reading below 50 signals contraction.
Moreover, several sub-indices showed contraction deepened in February. The sub-index for new orders was at 45.9 in February, down from 46.1 in January. The export order index fell to 44.5 from 45.1 in January, indicating the outlook for exports worsened in February.
With merchandise exports falling 16% year-on-year in January, the contraction in February is scary. Also, since today’s new orders are tomorrow’s output, it implies output in coming months is likely to continue contracting. The drop in non-oil imports during January is yet another sign of worsening domestic demand.
De-stocking continued at a rapid pace in February, with the index of finished goods stocks contracting at a record pace, from 49.8 in January to 45 in February. This reverses an increase in this sub-index from 45.6 in December, which had raised hopes that de-stocking was ending and firms would have to increase production.
The only sliver of hope lies in the employment sub-index, which showed a mild bounce from 47.8 in January to 49.1 in February, with fewer firms indicating staff cutbacks. But that’s not much of a comfort because most of the job losses are in small firms not covered by the survey.
The sharp fall in the rupee could be another reason for concern, particularly if the central bank feels it has to intervene to prop it up. That could lead to sucking out of rupee liquidity and further upward pressure on yields. But as A. Prasanna, senior economist with ICICI Securities Ltd, says, although the Reserve Bank of India (RBI) has been intervening, it doesn’t seem to be asworried as it was earlier.
It’s probably because banks are now in a much better position and rollover of corporate foreign debt is not so difficult. In the circumstances, and especially since almost all currencies are depreciating against the dollar, RBI may feel it’s not a bad thing to let the rupee depreciate to prop up exports.
Interestingly, the CLSA China manufacturing PMI has clawed back from its depth of 38.8 it plumbed last November and stood at 45.1 in February. In contrast, the lowest reading for India’s PMI was 44.4 last December.
But while the fiscal stimulus might be starting to work in China, it will be offset by continued weakness in exports as industrial economies continue to contract—the February manufacturing PMI for the Eurozone was at a record low of 33.5, while that for Japan, at 31.6, showed that the Japanese industry continues to shrink at an incredible rate.
In India, unfortunately, we do not even have scope for a big fiscal push.
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