India manufacturing robust in December, but PMI fell 1.7 points to 56.7

The seasonally adjusted HSBC Purchasing Managers’ Index (PMI) – a headline index designed to measure the overall health of the manufacturing sector – posted 56.7 in December, marginally lower than November’s 58.4. The latest reading pointed to a marked improvement of business conditions in the Indian manufacturing sector. While the rate of growth slowed, it remained above the long-run series average.

December data signaled a marked rise in incoming new business received by manufacturers in India. However, the latest expansion in new order volumes was slightly weaker than in the previous survey period. Growth of new business received from overseas markets also eased marginally at the end of 2010, but remained strong and comfortably above the historical trend.

Output increased substantially in December, reflective of sustained growth in overall new orders. However, backlogs of work increased for a ninth successive month. The rate at which outstanding business accumulated was weaker than in the previous survey period, but remained fast in the context of historical data. This suggested that pressures on operating capacity persisted as workloads continued to rise. In some cases, shortages of materials and labor compounded delays in production. Stocks of finished goods increased only slightly in December.

Despite sustained expansions of new business and output, employment in the Indian manufacturing sector was unchanged during the month.

Purchasing activity at manufacturers in India continued to rise markedly during December. However, in line with slower growth of output, the increase in input buying eased. Nonetheless, delivery times lengthened again. Panelists commented that short supply and excess demand for materials had led to the deterioration in vendor performance. Stocks of purchases rose for the 22nd successive month in December as manufacturers continued to increase pre-production inventories.

December data signaled a substantial rise in input prices faced by manufacturers in India. Input costs have increased in each month since April 2009, with the latest rate of inflation the strongest in eight months and notably sharp in the context of historical data. Output prices also rose markedly during the month, and at the fastest pace since May.

Commenting on the India Manufacturing PMI survey, Leif Eskesen, chief economist for India and ASEAN at HSBC, said: "Notwithstanding the deceleration from last month, these numbers are testament to the strong momentum in the manufacturing sector. Output continues to grow rapidly and order books are still getting thicker. The strong momentum is pushing the sector to the limit, with capacity constraints tightening. This is showing up in more outstanding business, lengthening delivery times, and, of more concern, an acceleration in both input and output prices. RBI's hawkish tones in their latest statement are well founded and tightening will resume in early 2011."