Why manufacturing activity slowed to an 11-month low in November

Manufacturing activity in the country declined to an 11-month low in November as costs rose and the number of orders declined, a private survey showed.

The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index (PMI) slipped from October’s 57.5 to 56.5 last month. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month and below 50 indicating a decline.

A quicker increase in input costs led to the steepest jump in selling prices in the 11 years since October 2013 amid competitive conditions, the survey said.

Participants in the HSBC survey suggested that additional freight, labor, and materials outlays had been passed on to clients. Input cost inflation rose midway through the October-December quarter, reaching its highest peak since July but remaining below its long-run average.

Prices of chemicals, cotton, leather, and rubber rose, curbing domestic sales to a certain extent, the survey pointed out.

Contrary to subdued domestic sales, new export orders gained momentum as the expansion in international demand was the best in four months, with panelists reporting gains from Bangladesh, mainland China, Colombia, Iran, Italy, Japan, Nepal, the UK, and the US.

With favorable demand, Indian manufacturers continued to scale up production, but the expansion rate receded to its weakest level in the calendar year.

The survey findings suggested that the slowdown reflected some units’ competitive conditions, inflationary pressures, and subdued orders.

“India recorded a 56.5 manufacturing PMI in November, down slightly from the prior month, but still firmly within expansionary territory. Strong broad-based international demand, evidenced by a four-month high in new export orders, fueled the Indian manufacturing sector’s continued growth.” Pranjul Bhandari, chief India economist at HSBC, said.

“At the same time, however, the rate of output expansion is decelerating due to intensifying price pressures. Input prices for various intermediate goods — including chemicals, cotton, leather, and rubber — rose in November, while output prices soared to an eleven-year high as rising input, labor, and transportation costs were passed on to consumers,” Bhandari added.

For the ninth month in a row, factory employment in India increased for permanent and temporary roles in November.  Despite softening from October, the rate of job creation remained solid, the survey showed.

Manufacturers continued to stock additional inputs but at the weakest rate in a year. On the other hand, inventory of finished goods, which had been declining since August 2017, came to an end.

S&P Global compiles the HSBC India Manufacturing PMI from responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers.

The decline in manufacturing activity in November comes after India’s gross domestic product (GDP) growth in July to September period slowed to 5.4%, the slowest in seven quarters,, government data released on Friday showed.

Analysts and economists had foreseen the slowdown in economic growth on weak consumption, subdued government expenditure, and adverse weather.

“The lower growth is mainly because of poor industrial sector performance, specifically mining, manufacturing and electricity segment,” Rajani Sinha, chief economist at Care Edge, said.