Factory activity expands fastest in 5 years, December manufacturing PMI at 54.7

NEW DELHI: Buoyed by a rise in output and new orders, India’s factory activity expanded at the fastest pace in five years in December, suggesting a further strengthening of the economic recovery seen in the September quarter.

The seasonally adjusted Nikkei India Manufacturing Purchasing Managers Index (PMI) rose to 54.7 in December from November’s 52.6. A reading above 50 denotes expansion.

Data released on Monday showed India’s eight core industries grew at the fastest pace in more than a year in November while the country’s biggest carmakers reported double-digit sales growth in December.


“India’s goods-producing economy advanced on its recovery path, with operating conditions improving at the strongest pace since December 2012,” said Aashna Dodhia, an economist at IHS Markit and author of the report. India’s GDP growth recovered to 6.3% in the July-September period from a three-year low of 5.7% in the preceding quarter.

“PMI has given a positive signal directionally as a short-term indicator,” said DK Joshi, chief economist at ratings firm Crisil. “After car sales and the core sector, it is one more indicator showing improvement in manufacturing but it is yet to be seen how sustainable this growth is. These are signals of economic recovery but this is also a period of disruption. So, we need to look at any indicator for at least three months before firming up a conclusion.”

The statistics office will release advance growth estimates for FY18 on Friday.

‘Need to Look at Trends’
This will underpin the budget next month. The manufacturing sector saw higher payroll figures in December while the rate of job creation rose to the most since August 2012, the report said. “All high frequency indicators are pointing towards a gradual recovery in manufacturing activity but a part of this is also due to a revival in exports,” said Saugata Bhattacharya, chief economist at Axis Bank. Merchandise exports rose 30.5% inNovember2017 from the contraction of 1.1% in the preceding month.

The December PMI marked the fastest expansion in output and new orders since December 2012 and October 2016, respectively, Dodhia said. “Anecdotal evidence pointed to stronger market demand from home and international markets.”

The latest survey showed the new orders sub-index, a proxy for domestic demand, rose to 56.8 in December, the highest since October 2016. Foreign demand also expanded at its quickest pace since June. To be sure, the trend will need to be watched before definitive conclusions can be drawn.

“Both core sector and auto sales data painted a mixed picture. Though recovery is happening, it has been a gradual process. We should look at 2-3 months’ average trend as the headline indicators have been volatile post GST,” said Tushar Arora, senior economist at HDFC Bank.

At the same time, stronger demand allowed firms to raise prices at the fastest pace in 10 months to make up for rising input costs. The goods and services tax (GST), which was implemented July 1, has continued to lead to higher raw material costs, with input cost inflation accelerating to the fastest since April, according to the survey report.

“Challenges remain as the economy adjusts to recent shocks, but the overall upturn was robust compared to the trend observed for the survey history,” Dodhia said. “This outlook was shared by the manufacturing community as sentiment picked up to the strongest in three months amid expected improvements in market conditions over the next 12 months.”