India manufacturing gains strength; PMI rises to 55.7

The performance of the India manufacturing economy improved further during May, building on the growth seen in April. The domestic market was the main driver of expansion, as foreign demand for Indian manufactures remained weak. A second straight month of output and new order growth led companies to hold off from further workforce rationalization. However, competitive pressures continued to restrain the pricing power of manufacturers. Despite accelerated input price inflation, firms cut their tariffs for the seventh month running.

The headline Markit Purchasing Managers’ Index (PMI) rose for the fifth successive month in May to 55.7. It was the highest reading since last September and indicated a marked improvement in the health of India’s manufacturing industry.

Production at Indian manufacturing plants rose at a strong pace during the latest survey period, mirroring a similarly steep increase in incoming new business. However, demand was focused on the home market as new work from abroad was largely unchanged since the previous month. Panel members cited improved (domestic) economic conditions and demand, new product launches, promotional activities and good quality service as the primary reasons for the expansions in output and new work.

Increased workloads led to a build-up of unfinished business during May. It was the fastest increase in outstanding orders since last September. However, the rate of growth was only slight.

With incoming new work and production rising since April, as well as an accumulation of backlogs, Indian manufacturers generally maintained their staffing numbers. Marginal growth in May ended a five-month period of retrenchment.

Buying activity and stock levels at Indian manufacturers were raised in May to accommodate greater demand for their products. Purchasing activity and pre-production stocks increased sharply over the month, and at the fastest rates for nine and 16 months, respectively. Meanwhile, growth of post-production inventories slowed, partly as a consequence of greater-than-anticipated sales levels.

Average lead times for input deliveries were unchanged during May. Where longer delivery times were reported, they were frequently attributed to higher demand for raw materials and short supplies of certain commodities. Where improved vendor performance was noted, more efficient order processing and the better availability of transport were mentioned.

Purchasing costs in India’s manufacturing sector rose for the second consecutive month, and at an accelerated pace in May. This was commonly linked to higher demand for raw materials. However, strong competition prevented firms from passing on their greater cost burdens to customers. Charges were reduced further, albeit at the weakest rate in the current seven-month period of decline.

Commenting on the latest survey findings, Gemma Wallace, economist at Markit, said: “Rising for a second straight month in May, the headline PMI indicates that India’s manufacturing economy is gaining strength, after a five-month period of weakness. Data show that the sector is currently being carried by robust domestic demand, as export sales continued to fall. Nevertheless, this alone was enough to boost manufacturers’ confidence; inventories were built up for the second month running, whilst workers were hired for the first time since last October. There is also evidence of mounting inflationary pressures within the sector. Demand for raw materials contributed to an increase in input costs over the month, although inflation also reflected speculation on commodities markets. While intense competition remained a bind on manufacturers’ pricing power in May, the latest cut in charges was only fractional. If competitive pressures are mitigated by further improvements in demand going forward, it will most likely result in output prices rising.”