Manufacturing sector shows revival

04 May 2009


Manufacturing activity in Indian factories picked up after a somewhat prolonged lull over five months in April with order bookings indicating a tentative recovery according to an industrial survey.

An important indicator of industrial sectors performance the ABN AMRO Bank purchasing managers' index (PMI) based on a survey of 500 companies, rose to 53.3 in April from 49.5 for March rising above the threshold of 50 that separates expansion from contraction.

The latest reading, the highest in seven months rose steadily after hitting a low of 44.4 in December.

The PMI survey is conducted by the UK-based Markit Group. According to analysts the return to growth comes with an improvement in domestic demand.

"Although the rise in new business came principally from the home market, there was also some, albeit slight, improvement in foreign demand for Indian manufactures," ABN Amro Bank's Indian arm said in an official release.

Analysts have been hinting of increasing economic activity in the months ahead, but the central bank has preferred to proceed with caution which was evident from its policy review last week.

Manufacturing contributes to only 16 per cent of India's gross domestic product and according to government data India's factory output declined for the third time in five months in February even as the global conditions cast their shadow on the Indian manufacturing sector. But analysts had some reason to cheer as they spotted some signs of revival after a dismal March quarter.

The manufacturing index has been boosted on a surge in new orders which rose to 54.9 from 49.5 in March.

According to the Reserve Bank the economy will grow around 6 per cent in 2009/10, a seven year low following an average rate of around 9 per cent or more in three fiscal years to March 2008.

In order to stimulate demand in the third-largest economy in Asia, the central bank has cut rates aggressively since October with the latest reduction announcement coming only last week. The move has flooded the banking system with cash to spur bank lending.

The key short-term lending rate is now 425 basis points down to 4.75 per cent.

Additionally, the government has slashed factory gate duties and announced stimulus packages including $4 billion in extra spending to shore growth in the face of the global downturn.

However, on the flip side the expansion has been accompanied by price inflationary pressures. A combination of increased prices for certain commodities and unfavourable exchange rates contributed to a moderated increase input costs during April. This is the first time the Indian manufacturing sector has recorded an input price inflation since last October.

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