HSBC’s manufacturing PMI for India was weaker in June due to a decline in output and new order flow, including from overseas, the financial services firm said.
PMI or purchasing manager’s index, is a gauge of confidence levels of purchasing managers in companies. It gives an indication of what companies expect will happen in the economy in coming months.
Globally, the PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.
“India manufacturing PMI fell to 51.3 in June (vs 52.6 in May), as output and new order flows weakened, including from exports. In line with the decline in orders, firms slowed their quantity purchases and cut back on the pace of inventory accumulation,” HSBC said.
On the positive side, inflation indicators fell noticeably after picking up last month. Both input prices and output prices were lower in June.
The order-to-inventory ratio also fell, implying future manufacturing may remain sluggish.
“Somewhat hidden in the details was the silver lining – capital goods growth was robust, a point echoed by the infrastructure index for May,” it added.
“On the inflation front, both input and output prices eased. A strong start to the monsoon season should give the RBI more comfort on its 6% by January CPI inflation target. From here on, all eyes will be on government capital expenditure, which so far has given mixed messages, and monsoon rains through July.”
While manufacturing activity continued to grow, the pace softened across the board, HSBC said.
“The order-to-inventory ratio, our preferred indicator of future manufacturing activity, deteriorated (1.0 vs 1.04 in May), with decline in new orders running higher than decline in finished stock of goods. This does not bode too well for future readings of manufacturing production.”
It however noted that embedded in details were nascent signs of capex recovery, “although nothing too solid as yet.”
“A cursory look at the overall PMI output and new orders indices shows that it has been quite a volatile year with no firm indication of either a steep fall in momentum or sustained uptrend. However, one sub-sector has begun to show some surer signs of growth – the press release from Markit indicated that of the three sectors it monitors, activity for capital goods was the strongest in June.”
“Surer uptick in capital goods is also corroborated by the infrastructure index in May (+4.4% y-o-y vs. -0.4% in April), strong performance in the capital goods sub-index of April IP and improvements in commercial vehicle sales.
“It is important to note however, that each of these indices are coming from a low base, so a couple of good readings could just be some consolidation along the way. In fact CMIE data on capex plans for the April to June quarter suggests that new investments so far into the year are tepid; and mostly by the government, not yet the private sector.”
With overleveraged corporate balance sheets and weak banking sector, all eyes are on the government’s capital spending this year.
“Will the central and state governments invest enough to revive investment and ‘crowd in’ the private sector over time? Data on central government expenditure for the two months in the year, April and May, gives mixed messages.
“While capital spending picked up in April, it fell back down in May. Agreed that capital spending tends to be lumpy and there are intentions to revive public investments, so far we cannot say with confidence that government capex has picked up meaningfully.”
It said the decline in inflation will give the RBI more comfort around its 6% CPI target. However, some others have said that the current dip in inflation could be reversed as the base effect wears off in August.
“The outlook for inflation has improved in recent weeks, thanks to the strong start to monsoon season. Rains have been 16% above normal in June, resulting in an improvement in sowing patterns for major crops (pulses and oilseeds). While authorities still warn of weak rainfall in July, a crucial month in the season, the good start has improved reservoir levels which are likely to aid agricultural production.”
The fall in both PMI input prices and prices charged is a positive indication and coupled with the strong start to monsoons, should provide the RBI more comfort around its 6% CPI target of January 2016, HSBC added.