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Factory growth dips in May but price pressures persist

Factory growth dips in May but price pressures persist
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First Published: Wed, Jun 01 2011. 11 26 AM IST
Updated: Wed, Jun 01 2011. 11 26 AM IST
Bangalore: Growth in India’s manufacturing sector eased slightly in May as the pace of new orders slowed, but factories’ input and output prices continued to rise sharply, reinforcing expectations of further policy tightening by the Reserve Bank of India.
The HSBC Markit Purchasing Managers’ Index, based on a survey of around 500 companies, edged down to 57.5 in May from 58.0 in April, weighed down by a slower expansion rate for new orders and a labour shortage.
Even so, the level of activity in India’s manufacturing sector maintained its strong momentum and the index has now stayed above the 50 that divides growth from contraction for the 26th consecutive month. Backlogs of work also continued to increase, though capacity pressures are leading to longer delivery times.
The new orders sub-index slipped in May to 62.4 and while still signalling ongoing improvements in general economic conditions, it was weaker than the 63.1 reported in April.
“The momentum in the manufacturing sector eased in May as sequential growth in output and orders slowed a bit. However, the momentum remains strong,” said Leif Eskesen, chief economist for India & Asean at HSBC.
While strength in the manufacturing sector augurs well for the economy, the survey also showed the output prices sub-index picked up speed in May while input prices remained elevated.
Expectations of further tightening by the Reserve Bank of India (RBI) have strengthened after the central bank increased its benchmark repo rate by 50 basis points in May in a bid to tackle stubbornly high inflation, even if the trade-off was a slowing in economic growth.
India’s economy grew 7.8% in January-March from a year earlier, its slowest annual pace in five quarters as rising interest rates took a toll on consumption and investment, data release on Tuesday showed.
Notwithstanding more moderate growth, the RBI is expected to raise rates by another 75 basis points this year, taking the repo rate to 8.0% by December, a level last seen in the latter half of 2008.
“The sequential growth rate of input costs decelerated again, but the readings are still elevated by historical standards. Moreover, output costs edged up faster. The numbers confirm that growth is holding up well and that inflation pressures are still firmly in place, which leaves the door open for continued monetary tightening,” Eskesen added.
The employment sub-index contracted the most in May since January 2009 when, at the height of the global financial crisis, firms slashed jobs to remain profitable. Survey compiler Markit said firms reported shortages of suitable labour to fill vacancies last month.
Similar manufacturing reports from China and South Korea on Wednesday also showed slowing growth, with recent data also pointing to economic sluggishness in Europe and the United States.
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First Published: Wed, Jun 01 2011. 11 26 AM IST