MANUFACTURING PMI CONTRACTS FOR SECOND STRAIGHT MONTH

PMI at 30.8 in May; job losses rise at fastest pace in 15 yrs on demand, logistics issues

The manufacturing activity continued to contract due to weak demand and logistics challenges in May, according to the monthly IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) survey released on Monday. The fall, however, was slightly slower than April’s historic contraction, as May saw factories opening slowly.

The Manufacturing PMI stood at just 30.8 in May, marginally up from April’s 27.4. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction. The latest reading pointed to another substantial decline in the health of the manufacturing sector.

The nationwide lockdown in April, coupled with a crash in export orders, had led to business conditions across the sector falling by the biggest margin ever and new businesses collapsing at a record pace. In May, jobs were hit the most. The number of job losses rose for a second straight month, at a quicker pace than April's 15-year-high, the survey said.

The PMI had already been on a downward curve since the Covid-19 pandemic began. After hitting an eight-month high of 55.3 in January, output had fallen to 51.8 in March. “The further reduction in May highlights the challenges that businesses might face in the recovery from this crisis, with demand remaining subdued while the longevity of the pandemic remains uncertain,” said Elliot Kerr, economist at IHS Markit.

Despite industrial activity partially resuming after April 20, manufacturing activity could not kick in fully. New orders fell for a second month in a row. Also, dearth of labour and raw material remained widespread, while supply chains could not be established, said industry bodies. As a result, firms continued to cut back production midway through the second quarter, the survey said.

Weak demand from international markets added to the deteriorating sales trend, with new business from abroad plunging further in May. Anecdotal evidence suggested that global measures to stem the spread of Covid-19 continued to stifle exports. In April, the rate of contraction in exports had risen sharply and outbound sales had dropped at the quickest pace in over 15 years.

Meanwhile, manufacturers saw input prices continuing to fall, albeit slower than in April. Surveyed companies mentioned that their suppliers had cut prices to secure orders. Firms opted to pass on lower costs to their clients, with another decrease in average output charges during May.

Again, output charges fell by a smaller margin in May, than in April.

Economists hope April and May will be the harshest months of FY21. “Most industry was closed in April and the effect of lockdown lingered on till May. So, the negative impact would be the largest during these two months,” said Devendra Pant, chief economist, India Ratings and Research.

Experts predict that overall industrial production for April, which is yet to be released, will show a major fall of 75-80 per cent. According to the data from the Index of Industrial Production, a collapse in manufacturing sector had led to industrial output falling by 16.7 per cent in March, when the lockdown had been in force for just five days.