Manufacturing Activity Recovers From Demonetisation Shock

India’s factory activity has fully recovered from the demonetisation setback with manufacturing sector expanding for the third straight month in March, taking activity back to the levels before demonetisation.

According to a Markit Economics report, Nikkei India Manufacturing Purchasing Managers’ Index, a gauge measuring activity in the manufacturing sector rose to 52.5 in March from 50.7 in February, rising at the fastest pace in five months, with a reading above 50 signaling expansion.

The manufacturers attributed the latest rise in production to solid growth in domestic as well as export work orders. The new orders index rose to a 5-month high of 53.6 from 51.3 the previous month.

The manufacturing PMI had declined sharply following the government’s decision to withdraw notes of Rs 500 and Rs 1,000 on November 8. The move caused huge trouble to daily life and businesses in the largely cash-based economy. In December, manufacturing activity levels hit a low of 49.6, indicating a contraction in the manufacturing sector. However, as the cash crunch eased, the world's fastest growing major economy has largely recovered from Prime Minister Narendra Modi's shock decision.

The survey also showed encouraging signs on the inflation front, which has come squarely back on the central bank's radar in recent months. Input prices grew at a slower pace compared to February, and there was a corresponding slowdown in the pace of output price rises as well, which likely helped increase demand.

Indian inflation picked up pace in February to 3.65 per cent, after slowing in the previous month to 3.17 per cent, its lowest in at least five years, but it was still below the central bank’s 4 per cent target.

The Reserve Bank of India shifted its policy stance from accommodative to neutral and kept the policy repo rate unchanged at 6.25 per cent in its February meeting, opting to wait for more clarity on inflation trends and the impact of demonetization. The experts believe the central bank is unlikely to cut interest rates in its monetary policy review on April 06, 2017.

Going ahead, the survey projected a bullish outlook as business confidence among manufacturers improved in March, with almost one-fifth of the panelists expecting output levels at their units to be higher in 12 months’ time.

Latin Manharlal Group