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Business momentum in India’s manufacturing activity saw a remarkable improvement in July. The seasonally adjusted S&P Global Purchasing Managers’ Index (PMI) jumped to 56.4 in July from 53.9 in June. A reading above 50 indicates expansion.

The July reading was the highest in eight months, aided by new business orders and better output. But this marked rise in the headline index may well be a one-month wonder. The performance of a slew of PMI sub-indices, which measure the various aspects of the manufacturing activity, is not as buoyant. In fact, they point to the underlying pain the sector is dealing with.

Devil is in details
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Devil is in details

Domestic demand did most of the heavy-lifting as indicated by the New Orders Index, which rose to 60 in July from 55.7 in June. “But despite the rise in orders and output, there weren’t any signs that firms were running up against capacity constraints," Adam Hoyes, assistant economist at Capital Economics, said in a report on 1 August. As the alongside chart shows, the Backlogs of Work Index stagnated at 50.5 in July.

Secondly, the New Export Orders Index was subdued and fell to 52.6 in July from 54.9 in June. This is not surprising considering that the recently published flash PMIs of advanced economies point to poor external demand. But with export recovery delayed, the overall business momentum in the Indian manufacturing sector would eventually suffer.

“In July, India was an outlier to have seen improvement in manufacturing PMI compared to export-oriented economies such as Vietnam, the Philippines, Taiwan and China, seeing moderate-to-sharp declines. Given that global demand is on a weak footing, India is unlikely to remain decoupled from this trend for long," said Madhavi Arora, lead economist at Emkay Global Financial Services Ltd.

Moreover, the job creation scenario in India’s manufacturing sector remains in a sorry state. The PMI report highlighted that 98% of the firms who participated in the survey opted to leave workforce numbers unchanged amid a lack of pressure on operating capacities.

Simply put, things are not exactly hunky dory yet. Had that been the case, then confidence among Indian manufacturers should have improved drastically. Business optimism gauged by the Future Output Index rose merely to 51.3 July from 50.9 June. According to the PMI survey report, despite improving from June’s 27-month low, the overall level of business sentiment was muted in the context of historical data.

“In fact, 96% of manufacturers forecast no change in output from present levels over the course of the coming 12 months," the PMI report said.

Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics, points out that the rise in the future output sub-index barely matches the hefty gains signalled in April and May. So, he expects the manufacturing bump in India’s PMI in July is “likely one-off."

On the bright side, cost inflation pressures are easing with the input prices index at an 11-month low. That said, inflation measured via the consumer price index is still running above the Reserve Bank of India’s (RBI) comfort level of 6%. Economists foresee companies in both manufacturing and services sectors continuing to take price hikes to protect their profit margins. This means while input costs may not see a sharp incremental rise, selling prices could move upwards.

Meanwhile, at its policy meeting this week, the RBI is expected to raise the repo rate by another 35-50 basis points. One basis point is 0.01%. Economists expect the quantum of rate hikes to be modest if inflation pressures continue to recede.

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