Index contracted to lowest since March ’09.
By R. Chandrasekaran
CHENNAI: The purchasing managers’ index (PMI) of HSBC has contracted in May to probably the lowest in four years causing more concerns for the policy makers.
The total HSBC manufacturing PMI slipped to 50.1 from 51 in April and it was the third consecutive monthly drop. Though the reading managed to hold above the 50 level, the contraction is the lowest since March 2009. The worst seems to be the factory production sub-index that dropped to 48.6 in May from 50.2 in April.
Softer domestic orders were blamed for the manufacturing output contraction in May. Also, the higher interest rates, struggle to restrict inflation, policy paralysis, uncontrolled spending and weak worldwide demand have all brought India to a slower growth pace.
The sore point from the HSBC manufacturing PMI survey is the factory output during the first two months of the fiscal year that has slowed nearly to the verge of contraction. This is certainly not a good sign after the economy witnessed a feeble recovery in the fourth quarter compared to the third quarter.
However, the strong point from the PMI is that export orders recorded faster pace in May than April, thus avoid running a downside risk in June. The survey also indicated that companies have cut down their prices.
The latest data on manufacturing growth come on the heels of India recording a GDP growth of 5 percent for the financial year ended March 2013 and 4.8 percent in the fourth quarter. The PMI also came on the back of comments made by the Reserve Bank of India Governor D. Subbarao on the threat of inflation.
There are already economists and global institutions that have reduced their economic forecast on India to below 6 percent though there is consensus that the economy has bottomed out. The latest to join the list is Bank of America Merrill Lynch, which has cut down the economic growth rate to 5.8 percent from its earlier projection of 6 percent for the current fiscal year.
Though the Reserve Bank of India has reduced 75 basis points in interest rates in 2013 alone, it seems that that is not enough to stimulate growth. While everyone is expecting a further 25 basis points cut in interest rates, D. Subbarao’s recent comments that the risk of higher inflation and current account deficit have dampened the hopes of an interest rate cut in June meeting.
Interest rates alone cannot revive the growth pace since power outages have also contributed to the fall in production during the month of May. However, interest rate cut does play a role in consumers’ mindset as far as realty, consumer durables and automobile sectors are concerned.
It is not just the RBI alone, even the rating agencies such as Standard & Poor’s and Moody’s expect the government to take more steps to stimulate growth.
To contact the author, email to : rchandrasekaran@americanbazaaronline.com