Seven-month low manufacturing PMI supports Rajan’s rate cut call

RBI governor did the right thing by reducing the policy rate by 50 basis points on Tuesday, as a push to growth is sorely needed

Graphic by Prajakta Patil/Mint
Graphic by Prajakta Patil/Mint

The Nikkei India Manufacturing Purchasing Managers’ Index for September, which at 51.2 came in at a seven-month low, indicates a sharp deterioration in manufacturing momentum and underlines the fragility of the industrial recovery in the country. A reading above 50 denotes expansion.

The deceleration shows that a push to growth is sorely needed, confirming that Reserve Bank of India (RBI) governor Raghuram Rajan’s reduction of the policy rate by 50 basis points on Tuesday was the right thing to do. One basis point is one-hundredth of a percentage point.

The output sub-index, a component of PMI, weakened to its lowest since May last year. New export orders were at their weakest in the past 24 months, reflecting the global slowdown in growth. All this has had an impact on manufacturing employment, leading to a bit of job-shedding in September, according to the survey.

The slowdown in global growth, affecting the export sector, is clearly seen in the manufacturing PMIs for Asia. The PMIs for China, Indonesia, Malaysia, South Korea, Taiwan and Vietnam were all below 50 in September, indicating their manufacturing sectors were contracting. The Caixin China General Manufacturing PMI for September was at a six-and-a-half-year low. China’s Composite PMI, which covers both the manufacturing and service sectors, showed business activity declined at the quickest rate since the start of 2009. Even Japan, despite its manufacturing PMI showing a marginal expansion with a reading of 51, saw its new orders from abroad decrease for the first time since June last year, in spite of heroic efforts to weaken its currency.

In Europe, the Eurozone Manufacturing PMI was at 52 indicating a modest expansion, but Markit chief economist pointed out, ‘“Despite unprecedented central bank stimulus and substantial currency depreciation, the eurozone manufacturing sector is failing to achieve significant growth momentum and even risks stalling again.” Weakness abroad meant the India Manufacturing PMI’s export order sub-index fell sharply in September, although it remained in the expansion zone.

It isn’t only the external sector that’s in trouble. Significant weaknesses remain in the domestic sector.

RBI’s Monetary Policy Report had pointed out that the outlook for investment demand remains lacklustre with a shrinking pipeline of greenfield projects, lack of forward movement on the brownfield pipeline, build-up of finished goods inventories and high stress on banks’ balance sheets.

“The industrial sector continues to suffer from structural weakness in various core sectors: financial stress among distribution companies (Discoms) in the electricity sector, declining natural gas and crude oil production, coal production impacted by weak demand, and sharp fall in international steel prices affecting domestic producers,” the report said. “Overall consumer confidence polled in the September 2015 round of the RBI’s survey ebbed with regard to prospects for income and employment.”

The sluggishness in output has been reflected in prices. The manufacturing PMI survey confirms price pressures are absent, with the data showing the first back-to-back decline in input prices since the financial crisis. The lower prices were passed on to the consumer and the output prices sub-index has also declined in the last two months. No wonder Rajan seems confident inflationary pressures are ebbing, giving him room to stimulate the economy by cutting rates..