India manufacturing PMI rose to 27-month high in May

The seasonally adjusted HSBC Purchasing Managers’ Index (PMI) climbed to its highest level since February 2008 in May. At 59.0, up from 57.2 in April, the index pointed to a considerable improvement in operating conditions faced by Indian manufacturers. The PMI has registered above its long-term trend of 55.9 since January.

Production at Indian manufacturers rose sharply and for the 14th consecutive month in May. Reports indicated that activity levels were raised in response to further gains in new business. Incoming new work expanded at a substantial pace on the month, which companies linked to favorable economic conditions, strong market demand (from both public and private sectors) and good business reputations. Data revealed that the domestic market remained the primary driver of overall new order growth, as the rise in new work from abroad weakened. Nevertheless, receipts of new export orders continued to increase at a robust pace.

Outstanding business accumulated at an accelerated pace during the latest survey period. The robust increase reflected further growth of new work and delays caused by longer supplier delivery times. To meet sales levels and honor delivery agreements, manufacturers depleted existing stocks of finished goods. Although lead times on raw material deliveries lengthened only moderately in May, the rise was nevertheless a series record. Panel members cited greater demand for inputs, shortages of certain commodities and power cuts as the primary reasons for the latest deterioration in vendor performance.

To accommodate higher production requirements and company expansions, Indian manufacturers hired extra staff and added to pre-production stocks in May. Job creation was modest and the most marked since August 2005. Meanwhile, buying activity rose sharply, resulting in a survey record increase in raw material holdings.

Both input and output price inflation abated somewhat since April. Nonetheless, both measures remained firmly above their long-term series trends. Purchasing costs increased at a rapid pace, which respondents linked to greater raw material prices, especially for metals. Manufacturers passed through part of the input price inflation to customers by way of higher charges, which rose markedly and for the ninth month in succession.

Commenting on the India Manufacturing PMI survey, Frederic Neumann, co-head of Asian economics research at HSBC, said: “The Indian economy is hardly pausing for breath. Output growth remains at a robust pace and new orders continue to pour in. This is benefiting the job market as more and more firms are hiring, ultimately helping to support the boom in consumption in the local economy. Price pressures remain elevated and are of concern. However, the recent readings point to a stabilization of price pressures, with both the input and the output price indices easing back a little in May. This signals the need for further monetary tightening, although the cooling of new export orders, mirroring a possible slowdown in the global trade cycle, may help the authorities a little in containing price pressures further.”