The gross domestic product (GDP) data for the March quarter showed manufacturing as the weakest sector in the Indian economy, with output contracting by 1.4% from the year-ago quarter. But the Markit Purchasing Managers’ Index (PMI), which measures manufacturing expansion or contraction on a month-to-month basis, shows that the bottom in the sector was reached in March, with the index going above 50 in April and May. A reading above 50 signifies expansion in activity compared with the previous month.
What’s more, the PMI rose to 55.7 in May compared with 53.3 in April, which indicates that the strength of the expansion has been increasing. Also, the New Orders sub-index rose to 59.1 in May, the highest since last September.
In fact, the sharp deterioration in the manufacturing sector in the last quarter of 2008 is best seen from the rapid decline in the New Orders component of the PMI, which was as high as 62.6 last September, fell to 54.4 in October and then fell to 43.2 in November. Just as the sudden fall in the New Orders sub-index was the result of the panic that gripped industry at the time, its rapid recovery is the result of renewed optimism on the part of manufacturers. It’s very unlikely that the panic of October-November will be repeated and the strength of the New Orders component, therefore, is another indication that the recovery is likely to be sustained.
The PMI rose to 55.7 in May compared with 53.3 in April, which indicates that the strength of the expansion has been increasing. Also, the New Orders sub-index rose to 59.1 in May, the highest since last September. Ahmed Raza Khan / Mint
Economists are now becoming increasingly convinced that recovery is gathering pace and have started revising their GDP forecasts upwards. For example, Sonal Varma, economist with Nomura Securities, has revised her GDP forecast for FY10 from 5.3% to 6.3%, citing resilient investment and easier financing. Rohini Malkani, economist with Citigroup, has also revised her forecasts higher, “on the back of the election results and incorporating the CSO’s (Central Statistical Organization) new numbers for FY09, we are revising our FY10 GDP from 5.5% to 6.8% and FY11 GDP from 6.6% to 7.8%. The upward revision is primarily due to higher investment growth”. It’s no surprise, then, that the stock market continues to rise.
The continuing contraction in exports, though, has been a worrying sign, although HSBC economist Robert Prior-Wandesforde points out: “It is worth noting that the base effect for exports was extremely challenging in April, suggesting that an unchanged year-on-year result is consistent with a strong month-on-month seasonally adjusted increase. The same cannot be said of imports, although the sharpness of the drop has more to do with big year-on-year commodity price falls than volume effects.” That said, it’s also worth noting that while India’s exports contracted at 33% y-o-y in both March and April, the fall in South Korea’s exports was 20% in April, while Chinese exports fell 22.6% in that month and 17% in March. In other words, the contraction in Indian exports was worse than for countries such as South Korea and China. With Korean exports falling by 28.3% in May, it’s very likely that the weakness in external demand for Indian exports, too, will continue, thrusting the entire burden on the recovery on the domestic sector.
Incidentally, as Kotak Mahindra Bank economists Indranil Pan and Kaushik Das underline, there has been a slight improvement in non-oil imports in April over March (in absolute terms). That fits in snugly with the expansion in the PMI seen in April. Extrapolating the trend will mean that non-oil imports will rise in May, in tune with the higher PMI, which, combined with higher oil prices and stagnant exports, will mean a higher trade deficit.
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