Manufacturing expands for second month post-GST, but growth fails to cheer

Growth in manufacturing remained intact in September compared to August, but job generation accelerated at the fastest pace in almost five years, according to a widely-tracked Nikkei purchasing managers’ index (PMI).

Investments continued to be subdued, indicating that the economy will take time to recover.
The PMI stood at 51.2 in September, the same as its August reading. The figure was below the long-run trend of 54.1. 
A reading below 50 denotes contraction and one above that means expansion. 
Aashna Dodhia, the author of the PMI report, says that demonetisation and the goods and services tax (GST) continue to have lingering effects on the economy. 
IHS Markit, the compiler of the data, has downgraded economic growth projections for India to 6.8 per cent for the current financial year.
However, manufacturing expanded for the second month in a row after it contracted in July due to the GST roll-out. That said, the rate of growth softened compared to August, and was modest.
Reflecting improvements in new orders (and subsequent capacity pressures), manufacturers continued to increase their payroll numbers in September.
Growth in the consumer and intermediate goods categories offset a contraction in the investment goods sector.
Inflows of new orders increased for the second month in succession in September. The rate of growth softened compared to the preceding month and was marginal overall. Where an increase was registered, firms cited stronger domestic demand.
Those panelists that recorded lower new business commented on the negative impact of GST.
Dodhia says it will be interesting to see if India’s new economic advisory council, headed by Bibek Debroy, can bolster economic recovery.
Meanwhile, new export orders decreased, thereby ending a three-month period of expansion as demand from international markets reduced. That said, the rate of contraction was fractional. 
According to official figures, exports rose in double digits in August. If the PMI is any indication, growth in exports might see some adverse impact in September. Rupee appreciation against the dollar may further cast a shadow on exports.
“The strengthening of the rupee may put a strain on efforts to rejuvenate demand for Indian goods in export markets,” says Dodhia, who is also economist at IHS Markit.  
The rate of employment growth quickened to the fastest pace since October 2012. Staffing levels have risen in three of the past four months.
Even as companies continued to have concerns over the GST, Dodhia says business confidence strengthened among manufacturers as they reportedly anticipate long-term benefits from recent government policies. This was confirmed as the sector experienced gains in employment.
The introduction of the GST as well as higher prices for steel and petroleum products reportedly increased cost pressure in September. The rate of inflation was modest, and remained below the long-run series average. Firms raised prices to protect margins amid inflationary pressures. Nonetheless, due to competitive conditions, they were able to increase output charges at a marginal pace.
Destocking continued at the end of the third quarter, with both pre- and post-production inventories reducing. The latter decreased at a fast pace.

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