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Factory PMI print in April may be the best for some time to come

Although the central bank is recognizing inflation fears, the actual impact could be higher than anticipated if commodity prices continue to inch-up. We should brace for disappointing PMI readings not only the headline number, but even input costs and business confidence, according to an economist.Premium
Although the central bank is recognizing inflation fears, the actual impact could be higher than anticipated if commodity prices continue to inch-up. We should brace for disappointing PMI readings not only the headline number, but even input costs and business confidence, according to an economist.

  • For the ninth month in a row, the headline manufacturing PMI has managed to stay in the expansion zone, but economists caution that this momentum could fast fade considering the way covid infections are rising in the country

India is now the global hotspot of covid-19 infections. So, the modest improvement in the country’s manufacturing business activity in April hardly brings any cheer. IHS Markit data showed purchasing managers’ index (PMI) for April rose marginally to 55.5 from a seven-month low of 55.4 in March. A reading above 50 indicates expansion, while below this threshold points to contraction.

For the ninth month in a row, the headline manufacturing PMI has managed to stay in the expansion zone. But economists caution that this momentum could fade fast considering the way infections are rising.

“Note that the surveys are conducted in the middle two weeks of the month. The April reading will not have captured the latest jump in infections—India became the first country to report over 400,000 cases in a single day on Saturday—and the further ramping up of containment measures," said economists at Capital Economics Ltd.

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It should be noted that key manufacturing hubs Maharashtra, Gujarat and Tamil Nadu have extended restrictions until the middle of May. Given the shortage of oxygen supply, the government has redirected supplies away from some factories to hospitals. Simply put, tighter restrictions and voluntary social distancing would impact income and consequently demand.

Another worry for manufacturers is emerging from the ongoing escalation in commodity prices. The PMI survey report said that goods producers noted the steepest rise in input prices since mid-2014. “Anecdotal evidence highlighted higher chemical, energy, metal, plastic and transportation costs. As a result, factory gate charges increased. The rate of inflation was the fastest seen for seven-and-a-half years," added the report.

Going by the World Bank’s latest commodity price forecast, most commodities are poised for a bull run this year, with prices surging higher than pre-covid levels seen in 2019. Last month, RBI had acknowledged that a combination of rising logistics costs and global commodity prices could push input costs higher for manufacturers. The central bank revised its retail inflation target for the first half of FY22 higher to 5.2%.

“Although the central bank is recognizing inflation fears, the actual impact could be higher if commodity prices continue to inch up. Manufacturers are already grappling with financial stress. We should brace for disappointing PMI readings; not only the headline number, but even input costs and business confidence," said an economist with a domestic research house, requesting anonymity.

Of course, increasing the pace of vaccinations could be one way out of this crisis. But amid supply challenges, quickly inoculating India’s huge population is easier said than done. “Daily vaccinations are slowing as supplies are choked. They fell to 1,585 per million on average in the week ending 2 May. This is the third straight week that daily vaccinations have declined," said a Crisil Research report dated 3 May.

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