IHS Markit India Manufacturing PMI rose from 50.6 in October 2019 to 51.2 in November 2019 (Photo: Reuters)
IHS Markit India Manufacturing PMI rose from 50.6 in October 2019 to 51.2 in November 2019 (Photo: Reuters)

Of PMI and GST numbers: One swallow does not a summer make

  • The optimism could be short-lived given that some high-frequency data are still pointing that the slowdown is far from over
  • Indian manufacturers’ inability to show a meaningful expansion during this festive season and later shows challenges the road head is tough

India’s business activity gauges are signalling a marginal pickup in the economy after months of a gut-wrenching slowdown. In fact, both a pickup in the Purchasing Managers’ Index (PMI) and the goods and services tax (GST) collections in November have raised hopes that the economy may be close to bottoming out.

The headline seasonally adjusted IHS Markit India Manufacturing PMI rose from 50.6 in October to 51.2 in November. The increase, though, remained subdued compared to the earlier years, and much below historical averages.

A number above 50 indicates expansion, while anything below that threshold signals a contraction.

Corroborating this trend, GST collections in November rose to a seven-month high of 1.035 trillion, which is encouraging. Still, the optimism could be short-lived, given that some high-frequency data still indicates that the slowdown is far from over.

“While GST collections seem to have caught up pace in Nov ’19 leading to a higher average this year, we assume that it will be lacklustre going ahead due to weak economic activity this year, which is expected to weaken further in 3QFY20," said Motilal Oswal Financial Services Ltd in a report on 29 November.

Nonetheless, November 2019 GST collections have increased the monthly average for FY20 compared to last year. “On the brighter side, compliance appears to be strong indicating a wider tax base," said the Motilal Oswal report.

While that is encouraging, the path ahead is challenging. For the next four months, Kotak Economic Research estimates a monthly run rate of 1.4 trillion to meet FY20 GST Budget Estimates. This will be quite a challenge as it will require the economy to fire on all cylinders.

Graphic by Satish Kumar/Mint
Graphic by Satish Kumar/Mint

But that is far from the case. On the PMI front, the picture continues to remain grim as it underscores that growth rates for new orders and production were modest. The recent acceleration notwithstanding, companies shed jobs for the first time in 20 months and continued to reduce input buying.

This scaling back of input purchases, which declined for the fourth month in a row, could have a bearing on future manufacturing. “The weakness of these forward-looking indicators suggest that firms are bracing themselves for challenging times ahead," noted Pollyanna de Lima, principal economist at IHS Markit.

Besides, most other high-frequency data is on the decline. Auto sales decelerated again in November 2019 year-on-year. Gross domestic product growth for the September quarter at 4.5% year-on-year is nothing to write home about.

Economists note that the increase in GST collections and PMI gains are encouraging, but not meaningful. During the last festive season, the PMI data consistently clocked over 53, which was closer to historical averages. As such, Indian manufacturers’ inability to show a meaningful expansion during this festive season and later indicates that challenges ahead are plenty.

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