India manufacturing output rose for 16th consecutive month in July

The seasonally adjusted HSBC Purchasing Managers’ Index (PMI) – a headline index designed to measure the overall health of the manufacturing sector in India – climbed fractionally in July to 57.6, after slipping to 57.3 in June. The rise in the index signaled a faster improvement in operating conditions across India’s manufacturing industry.

Indian manufacturers raised output during July, extending the current sequence of growth to 16 months. The latest expansion was sharp and the most pronounced since March, with one-third of respondents noting a rise.

Supporting higher activity levels was another substantial inflow of new business. Despite a noticeable acceleration in new export order growth since June, data continued to imply that domestic demand was stronger than foreign demand. Panelists commented on an improved economic environment, successful advertising campaigns and reputations for high-quality goods.

To accommodate higher levels of production, Indian manufacturers purchased greater volumes of inputs at the start of Q3. Although it was the mildest since last December, growth of buying activity remained substantial. Consequently, holdings of raw materials and semi-finished goods rose markedly.

Supplier delivery times lengthened for the fifth month running in July as demand for inputs grew. However, the rate of deterioration slowed to only a fractional pace.

Anecdotal evidence suggested that Indian manufacturers continued to be dogged by power outages in July, as both power cuts and higher volumes of new orders were given as reasons for the latest rise in outstanding business. Backlogs accumulated at a moderate pace, although to a lesser extent than during Q2.

In spite of another sharp rise in market demand and a further build-up of backlogs, staffing levels remained largely unchanged across India’s manufacturing sector in July. Where new workers were taken on, this was commonly linked to greater production requirements. Meanwhile, firms that recorded a contraction frequently mentioned natural wastage and difficulties in sourcing skilled labor.

Both input and output price inflation gained pace during the latest survey period. However, each measure remained far weaker than their respective year-to-date averages.

Commenting on the India Manufacturing PMI survey, Frederic Neumann, co-head of Asian economics research at HSBC, said: “India is on a roll. The economy was given another leg up in July as new orders continued to pour in. Even the export sector appears to be holding up well, despite worries over cooling demand abroad. Strong growth, however, comes at a price: input and output price pressures show few signs of easing. As a result, the central bank will need to apply the brakes more forcefully and dampen demand with further interest rate hikes. Employment, to be sure, has dipped a little in July, but if recent trends persists this should prove to be a blip, rather than a more fundamental deterioration in the labor market.”