The July numbers from the HSBC Manufacturing Purchasing Managers’ Survey will not be of much comfort to the Reserve Bank of India (RBI). At 57.6, the PMI is a bit higher than the June number, showing strong month-on-month growth. The sub-indices for both new orders and new export orders continued to improve. Strong growth pushed up both the input and output price indices in July from their June levels, though they remain well below the rate of growth they had in May.
India’s rapid pace of manufacturing growth is also reflected in supplier delivery times lengthening for the fifth month running in July as demand for inputs grew. Backlogs of work accumulated at a moderate pace, though to a lesser extent than during Q2. Also, the employment sub-index fell slightly below 50 to 49.9, indicating a very slight contraction. The survey says managers complained of the lack of skilled labour. All three factors —lengthening supplier delivery times, increasing backlogs of work and shortages of skilled labour—could be signs that growth in India is increasingly reaching unsustainable levels. This is also seen from RBI’s monetary policy statement, which talked of “rising concerns about capacity constraints being reached over a wide range of sectors”.
Also See Growth Story (Graphic)
In short, though growth is very strong at the moment, it’s likely that it will hit road blocks in the form of capacity constraints and lack of skilled manpower. When that happens, two things could happen. One, inflation in manufactured goods will rise as supply is unable to keep pace with demand—this is already being seen. And two, imports will rise, as RBI’s monetary policy statement had pointed out that, “idle global capacity in a range of sectors will allow competitive imports to reduce the momentum in domestic prices”. As Frederic Neumann, co-head of Asian Economics at HSBC says, “The increasing inability of local producers to meet domestic demand is going to raise dependence on imports. Relatively strong spending at home, and weak demand growth in western markets (nearly 40% of the export market), are going to push out the trade deficit further, which may hit a record this year.”
Interestingly, the HSBC Manufacturing PMI for China slipped below the 50 mark in July, indicating a month-on-month contraction for the first time since March 2009. But the Shanghai Composite Index shrugged off the survey results, rising by 1.33% on Monday. The Chinese market is around 14% higher than the lows it reached earlier this month, which could indicate the market believes a soft landing has been engineered. India’s markets, too, rose in tandem with the rest, with banks leading the rally in the Sensex. The markets clearly display little fear of RBI’s cautious monetary tightening affecting growth.
Graphic by Yogesh Kumar/Mint
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