Indian manufacturers least optimistic among their global peers

Amid slowing demand and elevated inflation, the mood among Indian manufacturers remains grim. The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) fell to 53.9 in June from 54.6 in May. A reading above 50 indicates expansion and one below the threshold points to a contraction. The headline index remains in the expansion zone, but the latest figure is the lowest since September last year.

Some moderation was seen in cost inflation, with the crucial input price index falling to a three-month low. However, one should not cheer this softening yet, given that the index remains above its long-term average. “Monitored firms reported increases for a wide range of inputs, including chemicals, electronics, energy, metals, and textiles, which they partly passed on to clients in the form of higher selling prices,” said the survey report.

Adam Hoyes, an assistant economist at Capital Economics Ltd, explained that easing in price pressures was probably in part because of lower commodity prices. “However, slower growth in demand and the first decline in suppliers’ delivery times since February 2021 are likely to have played a role too,” he said in a report. Hoyes believes that as inflation continues to weigh on manufacturers’ confidence, the Indian economy is by no means out of the woods on the inflationary front.

Business optimism measured via the future output index slid to a 27-month low of 50.9 in June. As the chart alongside shows, India’s reading for this metric is lower than that of global and Asian regions. Unfortunately, economists do not see a respite from cost inflation for Indian manufacturers in the near term.

“At the moment, it is a bit too early to conclusively say that things are getting better on the inflation front for Indian manufacturers. The tax changes that were announced on Friday will have some inflationary impact,” said Rahul Bajoria, managing director and chief India economist at Barclays. The government has imposed special additional excise duty on the export of petrol and diesel and also raised the import duty on gold.

The prices of some food commodities such as palm oil and soyabean have decreased, Bajoria said. However, the pass-through into inflation will take some time. “So though we are not seeing an incremental inflationary pressure, it would take time for inflation to reduce meaningfully,” he said.

Meanwhile, economists expect the Reserve Bank of India to keep raising interest rates at its upcoming policy meetings to tame inflation.