After growing at the fastest rate in five years in December last year, the seasonally adjusted Nikkei India Manufacturing Purchasing Managers’ Index (PMI) has lost some of its momentum, slipping to 52.1 in February from 52.4 in January, well below December 2017’s 54.7. The accompanying chart has the details.

A reading above 50 indicates economic expansion from the previous month, while one below 50 points to contraction.

Although the reading is above the expansion threshold, slower growth in new orders could well mean that overall demand conditions haven’t completely revived yet.

At the same time, elevated input cost inflation pushed manufacturers to raise output charges. Although modest, output price inflation was the sharpest since February 2017, as the chart shows. Where selling prices were raised, there were reports of passing on higher cost burdens to clients, said the survey.

In short, the picture is one of slowing manufacturing expansion, accompanied by rising momentum in price inflation. It’s not the best of scenarios.

Commenting on the Indian Manufacturing PMI survey data, Aashna Dodhia, economist at IHS Markit and author of the report, said, “Cost inflation accelerated to the sharpest since February 2017, adding to expectations that inflationary risks will continue over the coming months. Furthermore, amid a stronger oil price forecast and growing fiscal risks, IHS Markit upgraded its CPI (Consumer Price Index-based inflation) forecast to 5.2% for fiscal year 2017-2018."

Perhaps what is of even more concern, however, is that business confidence appears to be fragile. The future output index, an indicator of business confidence among manufacturers, continued to decline from 60 in December to 58.7 in February. Animal spirits are yet to make a comeback in manufacturing.

Several macro headwinds, such as the prospect of higher inflation, rising bond yields and a looser fiscal deficit have made their appearance in recent months. Very recently, the banking sector has been under severe strain. At the very least, the government needs to simplify GST (goods and services tax) return filing and its exports refund mechanism. That would boost compliance, improve GST revenue collection and consequently save India’s fiscal condition from deteriorating further.

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