PMI: Manufacturers resort to price discounts to drive demand

  • The Manufacturing Purchasing Managers' Index (PMI), compiled by IHS Markit and Nikkei, fell to 52.1 in June from 52.7 in May
  • As per the survey, while gauges of factory orders, production, employment and exports remained in growth territory, the rate of expansion softened in all cases

Business activity in India’s manufacturing sector slowed in June as expansion in new orders and output eased in spite of companies reducing prices.

The Manufacturing Purchasing Managers’ Index (PMI), compiled by IHS Markit and Nikkei, fell to 52.1 in June from 52.7 in May. A reading above 50 indicates expansion while one below that threshold denotes contraction.

According to the survey, while gauges of factory orders, production, employment and exports remained in the growth territory, the rate of expansion softened in all cases. This comes on the back muted domestic and international demand.

Commenting on the India PMI survey results, Pollyanna de Lima, principal economist at IHS Markit, said, “Firms tried to boost sales by offering price discounts for their goods, in light of subdued rises in cost burdens. Tamed cost inflation may assist competitive pricing and lift demand to a meaningful extent as we head into the second half of 2019."

The scenario was more disappointing among other Asian countries, collectively known as the Association of Southeast Asian Nations (Asean). Here, manufacturing conditions slipped into the contraction zone in June. This was due to weak expansion in output, which also weighed heavily on employment. The headline PMI for the region fell to 49.7 in June, down from 50.6 in May.

Vipul Sharma/Mint
Vipul Sharma/Mint


As a result, business optimism for the coming 12 months fell among manufacturers in India and Asean compared to a month ago.

However, a silver lining in this scenario of gloomy business outlook is easing raw material inflation. As the chart alongside shows, the input price sub-index for manufacturers across these regions has eased in June. Much of this has to do with the softening in crude oil prices.

As indicated by the output price index, firms have passed on this benefit to consumers in the form of price cuts. In fact, for India, the output price index fell to a 45-month low of 49.2 in June, remaining in contraction territory for a second straight month.

Meanwhile, some buoyancy in demand is also expected from monetary and fiscal stimulus from the Reserve Bank of India and the government, respectively.

The central bank is expected to cut interest rates by 25 basis points in August. But before that, in the Union budget, additional fiscal stimulus is likely to be provided to relieve the stress in the rural sector as well as to kick-start growth in the economy.

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