The rate of contraction in manufacturing activity eased considerably in June and was the softest since an expansion registered in March, signaling a turnaround in economic activity, according to data released by HIS Markit. However, latest surge in coronavirus cases and tightening of lockdown measures by many states may derail the recovery process.
The manufacturing Purchasing Manager’s Index (PMI) declined to 47.2 in June surging from 30.8 recorded in May, signaling faster normalision of manufacturing activity since the nationwide lockdown was lifted on 1 June. A figure of above 50 indicates expansion, while a sub-50 print signals contraction. Despite the rise, the latest reading pointed to a third successive monthly decline in manufacturing sector, even though far softer than April and May.
New export orders fell for the fourth month in a row signaling overall demand received little support from international markets. In line with the continued deterioration in demand conditions, Indian goods producers recorded a further reduction in employment during June. “Despite easing from May's survey record, the rate of workforce contraction remained among the quickest since data collection began in March 2005," IHS Markit said.
Eliot Kerr, economist at IHS Markit said India's manufacturing sector moved towards stabilisation in June, with both output and new orders contracting at much softer rates than seen in April and May. “However, the recent spike in new coronavirus cases and the resulting lockdown extensions have seen demand continue to weaken. Should case numbers continue rising at their current pace, further lockdown extensions may be imposed, which would likely derail a recovery in economic conditions and prolong the woes of those most severely affected by this crisis," he added.
HSBC India chief economist Pranjul Bhandari said the continued decline in PMI manufacturing needs to be interpreted with caution. “PMIs may not be ideal for tracking turning points. Instead, some of the other indicators we track, for instance the recently released core industrial output, electricity consumption, mobility, two-wheeler purchases, GST e-way bills generated, and year-to-date GST revenues collected, all suggest that things have improved from the lows of April. However, they still remain 15-40% weaker than a year ago," she added.
Car sales of the largest automaker Maruti Suzuki increased almost four fold in June compared to May signaling sequential rebound even though compared to June last year, sales declined 54%. Goods and Service Tax (GST) revenue collections improved significantly in June at ₹90,917 crore, signalling a strong rebound in economic activities, after the coronavirus crisis had depressed collections severely in the previous two months.
The Fitch Ratings in its latest Global Economic Outlook (GEO) released on Tuesday said it expects India’s GDP to contract by 5% in FY21. “In India, where authorities imposed one of the most stringent lockdowns globally to try to halt the spread of the virus, measures are being relaxed only very gradually; with a limited policy easing response and ongoing financial sector fragilities, we have pared our 2021 forecast to 8% from 9.5% in the previous GEO," it added.