Mint Primer: What the surprise manufacturing slowdown means

India remains the silver lining in an otherwise gloomy manufacturing story across the world.
India remains the silver lining in an otherwise gloomy manufacturing story across the world.

Summary

  • The HSBC India Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, surprisingly fell to an 18-month low in December. This came at a time when the economic growth has crossed expectations. Mint reviews its possible effect on the economy.

What was surprising about the PMI data?

The manufacturing PMI for December came in at 54.9 as against 56 in November. It was also the lowest since October 2022 when the index fell to 55.3. A reading above 50 means expansion while that lower than 50 means contraction. This surprised many as the economy had just registered a strong 7.6% growth in the July-September quarter on the back of a 7.8% growth in the April-June quarter. The just-concluded festive season, if consumer goods companies are to be believed, has been good, with outstanding retail loans crossing 50 trillion for the first time in November last year.

 

What caused the fall in manufacturing PMI?

Many factors have contributed to it. The pace of new orders has been slower than in previous months. This is due to fading demand for certain products. Also, it could well be a case of inventory management, as companies had built up stock in view of the festive season in the months before. Exports have been sluggish as well, registering negative growth in the first two quarters of 2023-24. Inflation continues to remain closer to the top end of Reserve Bank of India’s (RBI) target band of 4-6%. With a combination of these factors, manufacturing output in December rose at the slowest pace in 14 months.

 

What does this mean for India’s economic growth?

If the manufacturing slowdown continues, it may hurt growth that has been galloping at over 7.5% in the first and second quarters of 2023-24. As things stand, RBI expects 2023-24 growth at 7%. The government’s first advance estimate pegged it even higher at 7.3%. All indicators, including GST mop-up and direct tax collections, indicate continuation of robust growth.

 

How are the other economies faring?

Global Manufacturing PMI ended 2023 with a December score of 49, the 16th month it has remained below 50. US manufacturing has been contracting for the past 14 months. Europe, Japan and the entire ASEAN region are faring no better. China saw a manufacturing PMI of 50.8 in December—a four-month high. The battle to tame inflation in developed markets has seen interest rates rise and discretionary spending fall. India remains the silver lining in an otherwise gloomy manufacturing story across the world.

 

What is the outlook for Indian manufacturing?

The Future Output Index, which measures purchasing managers’ optimism on production in the near term, is encouraging. Indian purchase managers’ confidence is at a three-month high. This indicates a strong possibility of recovery in the manufacturing PMI soon. Other indicators like tax collections and corporate results have been buoyant. Exports may remain sluggish. However, a rebound in rural demand can push consumption, and consequently the manufacturing PMI, to much higher levels.

 

 

 

 

 

 

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