Weakening demand had a domino effect in the manufacturing industry, knocking down rates of increase in production, employment and business sentiment

Factory production is now almost stagnant as Purchasing Managers’ Index (PMI) for manufacturing slipped to two years low of 50.6 in October as against 51.4 in September.

PMI is compiled by IHS Markit from responses to monthly questionnaires sent to purchasing managers in a panel of around 400 manufacturers. The panel is stratified by detailed sector and company workforce size, based on contributions to GDP. Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. A diffusion index is calculated for each survey variable. The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease. The indices are then seasonally adjusted.

Pollyanna de Lima, Principal Economist at IHS Markit said that PMI data for October showed a continuation of manufacturing sector weakness in India, with sales growth softening to the slowest in two years. Weakening demand had a domino effect in the manufacturing industry, knocking down rates of increase in production, employment and business sentiment. With quantities of purchases contracting for the third month in a row, input costs fell for the first time in over four years during October.

“Following five successive cuts to India’s benchmark rate, and an apparent lag in how quickly this feeds through to consumers, the impending lowering of commercial lending rates could potentially revive private consumption and help to shift growth higher as we approach the year end. Goods producers may then be encouraged to resume investments and create jobs, which combined with cuts to corporate taxes could bode well for the outlook,” she said.

The report released along with index said that both factory orders and production rising at the weakest rates for two years. Subsequently, job creation softened to a six-month low, while companies were reluctant to hold excess stock and lowered input buying in response. Meanwhile, business confidence slipped to its lowest level in over two-and-a-half years. One positive sign is that growth was restored in capital goods and softened in the consumer goods category, while a quicker contraction was registered at intermediate goods makers.

Although sales increased for the twenty-fourth consecutive month, the upturn was the slowest over this period. Growth at firms that were able to secure new work was hampered by weak demand at other companies. Similarly, output expanded at the slowest rate in two years, which according to managers participating in survey that raised production, this reflected new business gains. Companies that signalled lower output, mentioned competitive pressures and subdued market demand. New export orders rose modestly, but at a quicker pace than in September, suggesting that the domestic market was the key source of weakness. Challenging market conditions, coupled with delayed client payment, dampened business confidence in October.

This index came 24 hours after a Government data showed that core sector (group of eight key industrial sectors such as coal, cement, electricity, etc contracted 5.2 per cent in September which is sharpest decline in nearly eight years. Now, overall industrial production growth data to be made public on November 12, but considering the trends, it is clear that that data will also be disappointing which in turn affect overall GDP (Gross Domestic Product) growth data for October-December period.