The seasonally adjusted ABN Amro India Manufacturing Purchasing Managers’ Index (PMI) dropped steeply in October, falling to a record low of 52.2. Any reading of above 50 indicates expansion, but place it in the context of the index falling from a reading of 57.3 in September and the sharp deceleration in growth comes through.

The biggest fall has been in the new orders sub-index, which went down to 54.4 in October from 62.6 in September. Since today’s orders are tomorrow’s output, it doesn’t augur well for output growth in future.

The saving grace is that most firms said demand remains strong in domestic markets, while international orders had waned. That’s also seen from the new export orders sub-index, which contracted to 49.7 for the first time in the history of the series. That fits in with the latest data showing export growth slowed to 10.4% in September.

Other sub-indices that showed a contraction (a reading below 50) include the backlogs of work index, the index for finished goods stock and the index for stocks of purchases. Fewer fresh orders mean the backlog of work, too, is lower. It also means that firms are beginning to see unused capacity. With fewer new orders, stocks of purchase have also come down, although that could also have been the result of expectations of lower input prices in the future.

Also See Dip in manufacturing (Graphic)

The implication of the lower stock of finished goods is mixed, with some firms linking reduced inventory to slower output growth, while others said good demand had led to lower finished goods stock. But with slower growth in new orders, for how long will demand hold up?

The input prices index fell to 51.1 from 57.8 in the previous month, but it is unlikely to be cause for celebration, because the output prices index has also fallen. While 12.8% of the respondents said they saw higher input prices in October, 5.9% said they saw higher output prices. As weaker demand takes its toll on pricing power, it will negate the positive impact of the fall in input prices.

But perhaps the biggest impact on demand will be lower growth in employment. The employment sub-index fell to 50.1 in October, indicating neither job loss nor job growth.

Note that China’s CLSA Manufacturing PMI fell to a dismal 45.2 in October, from 47.7 in September. The lower-than-50 reading indicates that Chinese manufacturing has started to contract. Their new export orders reading is at 44.3 and their new orders index at 43.8, indicating severe contraction. What’s more, their employment index was 48.2 in October, indicating there was a net job loss in Chinese manufacturing.

The good news is that Indian manufacturing has so far continued to expand and employment has been stable, unlike in China and every other major economy, where manufacturing activity has been falling.

Will the record low reading for the new orders index threatens to change that in the future? Perhaps not, says Ajit Ranade, chief economist of the Aditya Birla Group. He points to India’s relatively low dependence on export demand, its high savings rate and robust domestic demand, and says that, with the right policy mix, Indian manufacturing could continue to expand.

Graphics by Ahmed Raza Khan / Mint

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