Factory activity in India contracted for the second consecutive month in September as weak orders and high raw material costs prompted companies to reduce staff, although the slump eased compared to the previous month, latest data of a monthly survey showed.
The overall Purchasing Managers' Index (PMI) of HSBC, a metric to measure industrial activity capturing output to sales, stood at 49.6 in September from 48.5 in the previous month indicating a slower deterioration of business conditions in India.
A PMI reading below 50 indicates output contraction.
The average PMI for the July-September quarter, however, was the lowest since January-March 2009.
The HSBC India Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 companies based on industry contribution to India’s gross domestic product (GDP).
These provide an advance indication of what is really happening in the private sector economy by tracking variables such as output, new orders, stock levels, employment, suppliers’ delivery time and prices across the manufacturing, construction, retail and service sectors.
“Manufacturing activity continued to shrink in September, albeit at a slower pace. Order flows remain weak, especially export orders, and employment fell,” said Leif Eskesen, chief economist for India and ASEAN at HSBC.
“Moreover, businesses cut back quantity and stocks of purchases. While output prices rose at a slower pace, input prices rose markedly, as the effects of the weaker exchange rate continue to pass through,” Eskesen said.
All eyes will now be on India’s index of industrial production (IIP) data—a gauge for measuring production in factories—that will be released next week.
India’s infrastructure sector output grew 3.7% in August—the highest in seven months—boosted by strong coal, cement and electricity production rekindling hopes a sustained industrial rebound.
The seven infrastructure sectors-- coal, crude oil, oil refinery, natural gas, steel, cement, electricity and fertilisers --account for 37.9% of India's industrial output and these grew by a combined 3.1% in July.
The growth in August, however, was sharply lower than 6.1% growth in the same month of 2012, official data released Monday showed.
Factory output grew by 2.6% in July, expanding for the first time in three months but analysts had cautioned that it may too early to read these as the beginning of a sustained economic rebound as it was largely driven by an unexpected 15.6% jump in capital goods output from a contraction of 5.8% last year.
Eskesen said that heightened inflation risks will likely prompt the Reserve Bank of India (RBI) to keep interest rates to stymie demand and cool prices.
“The build-up in underlying inflation pressures suggests that the RBI has to keep its inflation guards up,” he said.