It continues to be a bumpy ride for the Indian manufacturing sector.

After recovering to a reading of 54 in December last year, the seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ Index (PMI) shows the country’s manufacturing sector is losing momentum.

From the beginning of this calendar year, the manufacturing PMI has been heading southwards and has slipped to 51 in March. A reading above 50 indicates economic expansion from the previous month, while one below 50 points to contraction.

For the March 2018 quarter, the average reading for the manufacturing PMI is 51.8, compared to an average of 52.5 for the December 2017 quarter.

Though the reading is above the expansion threshold, it suggests demand conditions are still not as buoyant as one would have expected them to be. Look at the new orders index—it has fallen in tandem with the headline PMI number (see chart).

On the other hand, the IIP (Index of Industrial Production) data paints an upbeat picture of the manufacturing sector and contrasts with PMI.

Factory output grew at a robust pace for the third straight month, at 7.5% in January compared to the year-ago period. In December 2017, it grew 7.1%.

But then, the rise in IIP has been driven by the low base effect of demonetization, waning impact of the goods and services tax (GST)-led disruption on production activity, rebound in global trade, especially in capital-intensive sectors, and increased consumption in high-ticket items like autos, say economists.

While the favourable performance of capital goods and consumer durables would be supportive of IIP readings for the months of February and March, pain in labour-intensive industries would hinder a rapid recovery in overall manufacturing activity.

For instance, business activity in key employment generating sectors such as gems and jewellery, textiles and leather goods has failed to recover from the aftermath of GST.

Exporters in these sectors are struggling with a stretched working capital cycle due to delayed GST refunds and increased compliance. Borrowing is expected to get difficult in the wake of recent banking scams and rising interest rates.

Last but not the least, fears of a global trade war triggered by rising protectionism in the US could have an impact on exports.

In short, these headwinds point to a very gradual recovery in the Indian manufacturing sector.

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