Factory output hits 13-month high as inflation, input costs ease

Indian manufacturers enjoyed a solid improvement in operating conditions during August. With demand from the domestic and external markets picking up, companies raised output accordingly. Firms also recorded an easing in cost inflation during the month, which in turn resulted in a softer overall increase in factory gate charges.

Climbing from 51.8 in July to a 13-month high of 52.6 in August, the seasonally adjusted NikkeiIndiaManufacturing Purchasing Managers' IndexTM (PMITM) - a composite single-figure indicator of manufacturing performance - showed a solid improvement in the health of the sector.   

Contributing to this was a sharp upturn in new business inflows, which expanded at the fastest pace since December 2014. Consumer goods producers led the increase, although solid growth was also seen in the intermediate and capital goods categories.

Manufacturers indicated that both the domestic and external markets had been sources of incoming new work. Indeed, August saw new export orders expand at the quickest rate in one year.

Subsequently, companies continued to raise output in August, with growth picking up to the strongest in one year. Consumer goods were once again the strongest-performing sector on this front.

Greater output requirements led some manufacturers to hire additional workers in August, but the overall rate of job creation remained marginal as the vast majority of firms left workforce numbers unchanged.

Buying levels were also raised, as companies attempted to build inventory levels. The upturn in purchasing activity was moderate, but the rate of growth was at a 12-month high.

Concurrently, holdings of pre-production items rose in August. Having eased since July, the rate of accumulation was only marginal. In contrast, post-production inventories declined for the fourteenth month running and to a greater extent. According to survey participants, orders were often fulfilled directly from stocks.

Higher prices paid for petrol and other raw materials led overall cost burdens faced by Indian manufacturers to rise further. However, the rate of inflation was only slight and the slowest since February. Similarly, factory gate charges rose at a softer pace that was weak by historical standards.

Finally, survey data highlighted an increasing degree of pressure on the capacity of manufacturers' operations as backlogs rose to the greatest extent since December 2013.

Commenting on the Indian Manufacturing PMI survey data, Pollyanna De Lima, Economist at IHS Markit and author of the report, said: Manufacturing PMI data show that the positive momentum seen at the beginning of the second semester has been carried over into August, with expansion rates for new work, buying levels and production accelerating further. Moreover, the sector's growth dynamics for the near term are encouraging as companies will likely continue their efforts to replenish stocks. In fact, IHS Markit forecast a robust 7.5 per cent increase in real GDP during the fiscal year 2016/17.

On the price front, survey data highlighted softer increases in input costs and output charges and, in both cases, inflation rates were below their respective trends. In light of these numbers, the RBI has scope to loosen monetary policy in the upcoming meeting to further support economic growth in India.