Manufacturing sector grew for the second straight month in February, though growth rate remained “well below-par” and rising inflationary pressure pushed firms to hike prices for consumers, a monthly survey showed on Wednesday.
The increase in prices, which was the fastest in nearly three and a half years and was triggered by higher raw material costs, also spoilt the case for any immediate interest rate cut by the Reserve Bank of India (RBI) and supported the recent shift in its monetary policy stance from ‘accommodative’ to ‘neutral.’
The modest expansion in factory output was largely driven by a rebound in export demand and the job scenario turned sluggish and the business confidence among manufacturers was subdued, the survey showed.
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The Nikkei Markit India Manufacturing Purchasing Managers’ Index (PMI) — a monthly indicator of manufacturing activity — increased to 50.7 in February, up from 50.4 in January, as output and order books grew at a faster pace.
A reading above 50 indicates expansion while any score below the mark means contraction.
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February is the second straight month of expansion for the manufacturing sector after the demonetisation-induced contraction at the end of 2016.
“Indian manufacturers benefited from recovering demand and raised production volumes in response to another expansion in inflows of new work,” said Pollyanna De Lima, Economist at IHS Markit and author of the report.
On the prices front, the survey said input and output price inflation quickened in February.
“Of concern, higher commodity prices resulted in increased cost burden facing manufacturers. The sharp rate of inflation seen in February was the most pronounced in two-and-a-half years and led factory charges to be raised at the quickest pace in 40 months,” Ms. Lima said.
The rate of inflation was strongest since October 2013.
However, the latest PMI reading was much weaker than the long-run series average (54.2), largely reflecting sub-par growth for output and new business.
“However, with growth rates well below-par, the sector still has many areas to develop before it can fire on all cylinders,” Ms. Lima said.
Despite the uptrend in the sector, employment scenario turned sluggish, though the rate of job losses was marginal.
“Businesses don’t yet seem convinced as to the sustainability of the rebound as highlighted by cuts to payroll numbers and destocking initiatives,” Ms. Lima added.
As per the survey, confidence among Indian manufacturers was relatively subdued in February.
The surge in inflation is likely to cause demand from price-sensitive consumers to fall and potentially jeopardise the economic recovery, Ms. Lima added.
The Reserve Bank of India, in its policy review meet on February 8, kept key interest rate unchanged at 6.25% and said it is awaiting more clarity on the inflation trend and impact of demonetisation on growth.
The next meeting of the MPC is scheduled for April 5-6, 2017.