India manufacturing still robust, but PMI slips 0.7 points to 57.8

At 57.8 in March, down from 58.5, the seasonally adjusted HSBC Purchasing Managers’ Index (PMI) slipped back slightly from February’s 20-month high. The fall largely reflected weaker expansions of both output and new orders. Nevertheless, the PMI remained at a level consistent with a sharp improvement in overall operating conditions. The index has now registered above the neutral 50.0 mark in each of the past 12 months.

New order growth was recorded for the 12th month running. Although the rate of expansion eased, it remained substantial and above the series average. Data suggested that the domestic market was still the primary driver of overall gains in new business. However, new export order growth accelerated slightly in March, extending the current period of expansion to ten months. Respondents linked the latest increase in total new work to a combination of improved economic conditions, strong company reputations, successful marketing campaigns and the introduction of new products.

Higher volumes of new business, alongside expectations of strong future client demand, prompted manufacturers to raise their production levels and build inventories in March. Output increased considerably, albeit by a lesser extent than in the previous month. This expansion of production contributed to a slight rise in finished goods stocks, which had been depleted during the first two months of the year. Meanwhile, input buying activity and pre-production inventories both increased at robust rates.

With growth of input purchasing the sharpest for twenty-five months, there were associated reports of capacity pressures at suppliers. Vendor performance deteriorated at the fastest pace since December 2008, with data pointing to a modest lengthening of lead times. Panel members indicated that shortages of raw materials and power cuts at suppliers had contributed to delivery delays.

Total volumes of outstanding business were broadly unchanged on the month in the Indian manufacturing sector in March.

Average cost burdens increased sharply across India’s manufacturing economy. Moreover, the rate of input price inflation accelerated to a series record pace. Panel members linked elevated purchasing costs to increased raw material prices, alongside higher taxes. Companies attempted to cover part of their greater cost burdens by raising their tariffs at a marked pace.

Commenting on the India Manufacturing PMI survey, Robert Prior-Wandesforde, senior Asian economist at HSBC, said: “The most attention-grabbing aspect of the March PMI release was the surge in input prices to a new series high, suggesting that companies are facing sizeable and mounting cost pressures. The survey also indicates that manufacturers are becoming more willing to pass on some of these increases in the form of higher output prices. While the results were no doubt impacted by the one-off duty hikes announced in the budget, the RBI can't afford to ignore the situation, particularly as more respondents are pointing to supply-side capacity pressures. We believe the Central Bank has plenty of catching up to do if it is to deal with the rapid escalation of price risks in the economy. On the activity side, both output and overall orders grew a little less rapidly in March, although it was encouraging to see a renewed bounce in export orders. In our view, the biggest danger to Indian economic growth in coming months will be an inability to meet demand due to a lack of capacity rather than a significant softening in demand itself.”