Factory activity shrinks for 1st time in 11 months
NEW DELHI: Manufacturing activity surprisingly contracted in June for the first time in 11 months despite states easing lockdown curbs as cautious consumer sentiment after two months of a brutal second wave forced producers to cut output.
The purchasing managers’ index (PMI) for the manufacturing sector dropped to 48.1 in June from 50.8 in May, according to data released by analytics firm IHS Markit. A figure below 50 indicates contraction.
The latest results highlighted renewed contractions in factory orders, production, exports and quantities of purchases. With business optimism fading over the month, job shedding also continued.
Demand weakness prompted firms to slash purchases of inputs in June. Buying levels marked one of the steepest declines since PMI data collection started in March 2005.
The dip in June PMI is somewhat at odds with the mostly positive high-frequency data available so far, said Aditi Nayar, chief economist at credit rating agency Icra. “Following the phased unlocking, GST e-way bills, vehicle registration, electricity demand and petrol consumption have all reported a sequential improvement over May and a year-on-year growth in June. While diesel consumption has contracted on a yearon-year basis in June, this is likely to be on account of high prices diverting some freight to the railways,” she added.
Pollyanna De Lima, economics associate director at IHS Markit, said the intensification of the Covid crisis had a detrimental impact on the manufacturing economy. “Companies became increasingly worried about when the pandemic will end, which resulted in downward revisions to output growth projections. As a result of subdued optimism, jobs were shed again in June. Out of the three broad areas of the manufacturing sector monitored by the survey, capital goods was the worst affected area in June,” she said.
The stretch of new order growth that started in August 2020 came to an end in June, with firms linking the deterioration in demand to the pandemic. Restrictions also curtailed overseas demand. New export orders decreased for the first time in 10 months, albeit modestly.
“Falling new orders, business closures and the Covid crisis triggered a reduction in output among Indian manufacturers. The decline was moderate relative to those seen in the first half of 2020 but ended a 10-month sequence of growth,” the data analytics firm said.
Most economic forecasters cut their GDP projections for FY22 to single digit as the second wave is expected to have a lingering impact on consumer sentiment and hurt rural demand. The World Bank earlier this week pared its growth forecast for India to 8.3% for FY22 from 10.1% estimated in April.