India’s manufacturing output in July contracted at a faster pace than in June, indicating that sporadic local lockdowns at a time of muted demand are hurting business activity at the national level, potentially delaying economic recovery.
Data released by analytics firm IHS Markit showed that Purchasing Managers’ Index (PMI) for manufacturing declined slightly in July to 46 from 47.2 in June. A figure above 50 indicates expansion, while a sub-50 print signals contraction.
Eliot Kerr, an economist at IHS Markit, said the survey results showed a “re-acceleration of declines" in the key indices of output and new orders, undermining the trend towards stabilization seen over the past two months.
“Anecdotal evidence indicated that firms were struggling to obtain work, with some of their clients remaining in lockdown, suggesting that we won’t see a pickup in activity until infection rates are quelled and restrictions can be further removed," he added.
More than two months after imposing a harsh nationwide lockdown to curb coronavirus infections, the central government lifted many restrictions on 1 June, allowing most business activities to resume; however, new disease hotspots emerged in the southern and eastern Indian states soon after, prompting local authorities to put fresh mobility restrictions, disrupting business again.
During an interaction with journalists on Saturday, Union finance minister Nirmala Sitharaman said a complete picture about growth recovery is yet to emerge.
“As long as the pandemic is active, we are talking about a situation full of uncertainty," she added.
Indian Oil Corp. Ltd (IOC), the country’s largest fuel retailer, on Friday said its capacity utilization, which had increased to around 93% in the first week of July, has fallen to 75% after many state governments imposed fresh curbs.
Madan Sabnavis, chief economist at Care Ratings, said the latest decline in PMI is indicative of the fact that supply chains have not yet been cemented and the localized lockdowns have affected production. “Also, notwithstanding the unlock process, households are still not free to move to provide a push to the consumption cycle. Further, the beginning of the monsoon has impacted both construction and other infrastructure work, thus pushing down the PMI," he added.
The International Monetary Fund (IMF) last week said high-frequency indicators signal a plateauing of economic activity in India, as the positive impact from unlocking is not as strong as the negative impact of the lockdown. It urged the government to contain the spread of the coronavirus pandemic on a priority to make the economic recovery sustainable.
The IMF has estimated the Indian economy to contract by 4.5% in FY21, while Goldman Sachs expected the June quarter to be the worst, with gross domestic product (GDP) shrinking by 45% as business activity stalled for at least two months due to stringent lockdown measures.
ICRA Ltd earlier this month revised its GDP projection for India in FY21 to a contraction of 9.5% from 5% estimated earlier, pointing to the continued rise in covid-19 infections in the unlock phase and persisting labour supply mismatches affecting supply chains and consumption patterns. “Given the severity of the pandemic and the duration of the safety measures that need to be employed, we now expect a deeper pace of GDP contraction in Q2 FY21 relative to our earlier forecast. The timeline for a firmer recovery out of the contractionary phase is now being pushed ahead to at least Q4FY21 from Q3FY21," it added.
Subdued demand was evident in the latest PMI by a marked decrease in new orders placed with manufacturers during July. Similar to the trend for output, the pace of decline accelerated from June but remained slower than at the height of the current crisis.
However, despite deteriorating operating conditions, manufacturers were increasingly optimistic regarding future activity. Sentiment towards the 12-month business outlook improved for the second month in a row to reach a five-month high even though the degree of positivity was still well below the historical average.
