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Economy Apr 1, 2013

Slowdown pinches: Manufacturing PMI at 16-month low

By Sourav Majumdar

The power situation in the country has continued to take a serious toll on the operating conditions in the manufacturing sector, with the manufacturing Purchasing Managers' Index (PMI), a composite indicator giving a snapshot of the manufacturing conditions, registering its slowest growth in 16 months.

The HSBC PMI reading for March showed a figure of 52, down from 54.2 in February, chiefly on account of power outages which hampered production seriously. Growth in total new orders and export business also slowed, according to the latest figures put out on 1 April.


Inventories of finished goods were depleted to meet demand, partly due to the output disruptions caused by power cuts. Reuters

According to the latest figures, March data signalled higher volumes of incoming new work in the Indian goods-producing sector. Growth in total new orders was, however, only moderate, the slowest in 16 months. Subsequently, Indian manufacturers depleted their stocks of finished goods to meet order requirements. Post-production inventories, however, fell only slightly.

In contrast, holdings of raw materials and semi-manufactured goods were accumulated, though slightly. Purchasing activity, meanwhile, did rise, but at the slowest since October last year. According to the HSBC-Markit study, however, job creation was moderate, though at the fastest rate since October last.

Explaining the readings, Leif Eskesen, Chief Economist for India & ASEAN at HSBC said: "Manufacturing activity lost momentum in March, with output growth slowing notably on the back of a deceleration in new orders and power outages. Inventories of finished goods were depleted to meet demand, partly due to the output disruptions caused by power cuts. This suggests that output could get a lift in coming months as inventories are replenished.

Encouragingly, input and output price inflation eased. Even so, the scope for further monetary policy easing remains limited."

According to the latest figures, input prices increased during March, as has been the case in each month since April 2009. However, while the rate of cost inflation was solid, it eased to the slowest in 32 months.

Anecdotal evidence suggested that raw materials had increased in price, with some mentions of unfavourable exchange rates. Subsequently, average tariffs rose, but the rate of increase was moderate and the slowest since October 2012. Monitored firms indicated that increased competition had prevented them from passing on to clients the full burden of cost inflation, a statement from HSBC said.

Profitability hit

Meanwhile, the slowdown seems to be pinching hard for India Inc now, despite the government and the RBI putting in a joint effort to try and get the economy back on the rails and kick-start investment activity. A report in The Economic Times on 1 April points to the fact that a spike in the interest burden of BSE-500 companies and depreciation had squeezed the net margins in the December quarter substantially. Significantly, interest outgo as a percentage of the companies' profits before interest and taxation (PBIT) rose sharply to 29 percent in the December quarter, the ET report says.

Clearly, despite RBI's protestations, the interest rate factor continues to be a major factor inhibiting corporate performance. This, together with the overall sluggish demand conditions, have taken a major toll on corporate performance for major companies, and thereby affecting their growth and investment plans.

However, with two successive rate cuts by RBI - the latest having been effected on 19 March - analysts feel that, going forward, the interest rate burden may ease somewhat for companies. A lot depends on how much of the signals banks actually take from the central bank, given the reality on the ground and the banks' inability to effectively pass on rate cuts to the customers.

by Sourav Majumdar

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