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A steep rise in the prices of raw materials and intermediates post the Russian invasion of Ukraine seems to have disrupted a feeble recovery in India’s manufacturing industry. Worse, unless the high inflation is checked, the sales of manufactured goods may start contracting in the months ahead.

The seasonally-adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) came in at 54.0 in March, down from 54.9 in February. Both new orders and output grew at their weakest rates in six months in March, while business confidence plunged to a two-year low.

This was even as the index remained above the 50 mark that separates growth from contraction for nine straight months. 

Pollyanna De Lima, economics associate director at S&P Global, wrote: “For now, demand has been sufficiently strong to withstand price hikes, but should inflation continue to gather pace we may see a more significant slowdown, if not an outright contraction in sales.”

Retail inflation, as measured by consumer price index, increased for the fifth successive month to 6.1% in February 2022 from 6.0% in January 2022 driven by higher inflation in food items.

As the Monetary Policy Committee is scheduled to meet on Friday, Morgan Stanley said on Monday it expected the RBI to embark on policy ‘normalisation’ with a 15-20 bps hike in the reverse repo rate.

Though export demand is robust and domestic consumption is reviving gradually, the manufacturing sector has remained rather weak in recent months. In Q3FY22, the sector’s gross value added posted a flat growth of 0.2%, as the third wave of the Covid-19 pandemic hit the country.

“Manufacturing sector growth in India weakened at the end of fiscal year 2021-22, with companies reporting softer expansions in new orders and production,” Lima wrote. “The slowdown was accompanied by an intensification of inflationary pressures, although the rate of increase in input costs remained below those seen towards the end of 2021.”

In February 2022, the PMI had reflected a modest improvement in both manufacturing and services with their levels at 54.9 and 51.8, respectively, as compared to 54.0 and 51.5 in January 2022.  There was apparently a slight uptick in industrial production in India before the Russia-Ukraine crisis. The growth in index of industrial production had risen to 1.3% in January 2022 from 0.7% in December 2021 albeit helped by a favorable base effect.

DK Pant, India Rating chief economist, said: “March PMI numbers show sluggishness in manufacturing activity. However, PMI and index of industrial production (IIP) numbers are not strictly comparable as IIP growth is computed on a year-on-year basis and PMI offers month-on-month comparisons.”

According to Lima, companies appeared very concerned about price pressures, which was a key factor dragging down business confidence to a two-year low. “Anecdotal evidence indicated that inflation concerns and economic uncertainty dampened overall confidence,” the survey said.

Meanwhile, there was a renewed decline in new export orders received by Indian goods producers, ending an eight-month sequence of growth.

On the employment front, there was a broad stabilisation in headcounts across the manufacturing industry, following three successive months of job shedding. Companies indicated that payroll numbers were sufficient to cope with current requirements.

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Author: Howard Caldwell