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PMI: India's manufacturing activity improves in May but..

  • A significant monetary stimulus may be required given the ongoing consumption slowdown
  • The rise in manufacturing activity was aided by new orders

The slight improvement in India’s manufacturing activity in May from the previous month could provide a glimmer of hope for investors after the dismal March quarter gross domestic product (GDP) data.

The Nikkei India Manufacturing Purchasing Managers’ Index (PMI), published by IHS Markit, rose to 52.7 in May from 51.8 in April. A figure above 50 indicates expansion, while a reading below that signals contraction.

The rise in manufacturing PMI does allay some concerns about manufacturing activity, but the key obviously is if the improvement will sustain.

The improvement in manufacturing activity was aided by growth in new orders. With elections out of the way, Indian goods producers expect their output to rise further.

As the chart alongside shows, the Future Output index, a gauge of business optimism for the next 12 months, also rose in May. Expectations of pro-business public policies, marketing initiatives, projects in the pipeline and favourable economic conditions were among the reasons boosting optimism, said the survey report.

However, for this momentum to sustain and confidence to last, a significant monetary stimulus may be required given the ongoing consumption slowdown.

So, while the Reserve Bank of India may announce a third consecutive rate cut at its policy meeting this Thursday, that may not be enough to bring the sector’s animal spirits back.

There are some expectations of a fiscal stimulus as well, but again, this cannot be taken for granted, given below-target GST (goods and services tax) revenue collections and the government’s tight fiscal position.

Meanwhile, Pollyanna De Lima, principal economist at IHS Markit and author of the report, said: “A revival in new order growth promoted a faster upturn in manufacturing production, as Indian firms sought to replenish inventories utilised in May to fulfil strengthening demand. The results show welcoming accelerations in expansion rates across a number of key metrics. When we look at the survey’s over 14-year history, the sector is growing at a below-trend rate."