Manufacturing Sector Contracts For First Time in Over Two Years

The the rate of decline was the sharpest in almost seven years. (Photo: iStockphoto)

In the first contraction in over two years, manufacturing sector output dipped in December to a 28-month low as new orders fell sharply and production took a big hit from heavy rains in Chennai, putting pressure on RBI to keep rates low.

Painting an even gloomier picture, the monthly PMI (Purchasing Managers’ Index) survey showed that the rate of contraction was sharpest in almost seven years since the global financial crisis.

The Nikkei India Manufacturing PMI, a composite monthly indicator of manufacturing performance, dipped from 50.3 in November to 49.1 in December. This is the lowest level of the index since March 2013. The PMI has slipped below the crucial level of 50 for the first time since October 2013. A figure above 50 indicates expansion, while the one below this level means contraction.

Purchasing Managers’ Index(PMI) dropped to 49.1 in December 2015 marking the sharpest drop since financial crisis in 2009. (Photo Courtesy: Nikkei Survey Report)

December’s incessant rainfall in Chennai impacted the manufacturing sector heavily, with lower orders leading companies to scale back output at the sharpest pace since February 2009.

<p>India’s manufacturing sector took a turn for the worse at the year-end, with already-gloomy internal demand further hampered by floods in the south of the country...such was the extent of the decline that the rate of reduction was the sharpest since the financial crisis. The continued depreciation of the rupee against the US dollar pushed inflation higher, with PMI price indicators pointing to stronger increases in both input prices and output charges.</p>

<p><b> Pollyanna De Lima, Economist, Markit</b></p>

Given a sharp deterioration in manufacturing output in China as well, the experts believe that the global headwinds can make things even worse for the Indian markets, which will add to the pressures on RBI to keep rates low.

The central bank is scheduled to hold its next monetary policy review next month, although three out of four rate cuts last year were effected outside the planned reviews.

Following the US Fed rate hike and expectations of further increases, more currency weakness is anticipated, which in turn would add strain to businesses’ dollar-priced debt and import costs, Lima said. The frail rupee boosted growth of new business from abroad, but corporate earnings can’t solely rely in external markets as global demand remains subdued, he added.

The weakening manufacturing sector can further hurt economic recovery, as the government has already lowered its economic growth forecast for 2015-16 to 7-7.5 percent from 8.1-8.5 percent.