The HSBC Markit Manufacturing Purchasing Managers’ Index (PMI) for May has reversed the declines of the previous months. The index had been declining from a high of 58.5 reached in February to 57.8 in March and further to 57.2 in April. This slowdown had been consistent with a deceleration in the pace of industrial growth as seen from the Index of Industrial Production. PMI for May, at 59 and a 27-month high, signals that manufacturing growth remains strong, reinforcing the trend seen from the gross domestic product (GDP) data that came out on Monday. Moreover, the new orders sub-index at 63.7 indicates manufacturing growth will remain robust. The good news is that the pace of rise in input costs has moderated, probably because commodity prices have fallen. Frederic Neumann, managing director and co-head of Asian Economics Research at HSBC, points out that the employment sub-index of the manufacturing PMI is at its highest since September 2005—that should alleviate some of the concerns about lower consumption growth arising out of the GDP numbers for the March quarter.

Graphic: Yogesh Kumar/Mint

Does this mean that external demand may slow? Well, PMI shows that the pace of new export orders is decelerating. But not all regions are slowing—in the UK, the CIPS/Markit manufacturing PMI held steady at a 15-year high, while in Japan job creation is at its sharpest in two years. What happens in the US, though, is critical.

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The April data from the commerce ministry shows that merchandise export growth was 36% year-on-year (y-o-y) compared with 54% in March, while imports were up 43% y-o-y compared with 67% in March. But even if exports slow, domestic demand will continue to support strong growth. In fact, lower growth in the rest of the world may actually help the Indian economy because of lower oil and commodity prices.

The problem, as Morgan Stanley economist for India and South-East Asia Chetan Ahya points out, is that high growth may lead to a burgeoning current account deficit, which will expose India to funding risks. April’s trade deficit, for instance, was a high $10.4 billion (Rs48,568 crore).

For the markets, if global growth remains tepid that will slow the pace of monetary tightening overseas, which should mean excess liquidity should buoy asset markets. Provided, of course, that the situation in Europe doesn’t become a full-blown panic.

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