India joins China in being one of only two economies where manufacturing has weathered its long winter of decline and has started to expand.
The ABN Amro India Manufacturing Purchasing Managers’ Index (PMI) stood at 53.3 in April, the first month of expansion since last October. A reading above 50 signifies expansion.
The effect on the stock market was immediate, with the benchmark Sensex index on the Bombay Stock Exchange vaulting 6.4% on Monday. The PMI reading confirms the multitude of indicators that have been, over the last few months, flashing green—indicators such as cement, steel and auto sales and a resumption of credit growth. The PMI readings from January this year had been increasing from the lows of December, but April is the first month it has gone above 50.
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The new orders sub-index was at 54.9 and this expansion will translate into output growth in the future. Interestingly, even the new export orders index showed expansion at 50.7, the first time since September. Fuller order books led to an increase in the stock of purchases and to higher finished goods stock.
There are, of course, some concerns as well. One, the expansion of new export orders is still weak. Next, some of the firms surveyed commented on delays in receiving client payments. Others noted that stock levels had been raised in anticipation of higher sales that never materialized. And finally, there’s a disconcerting trend of higher input prices.
The input prices sub-index went up to 52.4 in April, the survey showing that more expensive raw materials (partly due to unfavourable exchange rates) were the predominant drivers of inflation. The output prices sub-index, however, remained below 50, indicating pressure on margins, as ABN Amro senior economist Gaurav Kapur said.
On Monday, the CLSA Manufacturing PMI for China also crossed into expansionary territory, coming in at 50.1 in April. China’s official PMI index had already crossed above 50 in March and improved further in April. Interestingly, just like the Indian PMI, input prices for the official China PMI rose above 50 in April, as commodity prices rose as a result of the stimulus being administered.
For most other economies, the manufacturing PMI continued to contract in April, although the pace of contraction has been slowing. On Monday, the final Eurozone PMI for April came in at 36.8, deep in recessionary territory but still a six-month high.
That disparity between the performance of the developed and emerging markets is reflected in the performance of their stock markets. In the three months to 1 May, the MSCI US index was up 19.2%, while the MSCI Emerging Markets index was up 23.36%. The MSCI China index was up 26.46% over the same period, and the MSCI India index higher by 31.16%.
To be sure, there are strong headwinds ahead, including the election results, and the market may have run up too rapidly. But the PMI data show a robust fundamental basis for the current market rally.
Graphics by Ahmed Raza Khan / Mint
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