The Nikkei India Composite Purchasing Managers’ Index (PMI) for June 2018 came in at 53.3, its highest level since October 2016. The Composite PMI is a snapshot of private sector activity in the economy, a seasonally adjusted index that includes both manufacturing and services. A reading above 50 indicates expansion from the preceding month, while one below 50 denotes contraction.
October 2016 was the last month before the twin blows of demonetisation and the goods and services tax (GST) beset the Indian economy. The fact that the composite PMI is now at its highest since October 2016 indicates that the economy has recovered its momentum.
The rebound was strong both in the services and manufacturing sectors, with the manufacturing PMI at 53.1 and the services PMI at 52.6. New orders and staffing levels have improved. Those surveyed said they saw increased demand for their products and services.
The PMI surveys also show that input costs have risen sharply in both manufacturing and services sectors. While output prices too have increased, their rate of increase is much less than for input prices.
That is an indication that firms are facing margin pressures, as fuel and commodity prices rise.
Aashna Dodhia, an economist at IHS Markit, wrote: “The PMI data signalled the best improvement in the overall health of the economy since October 2016, propelled by solid growth in both the manufacturing and service economies, with the sharper rise in the former. However, overall input costs rose at the strongest rate since July 2014, and amid a weak rupee and higher oil prices, inflation may remain elevated. Given these circumstances, the chances of further monetary policy tightening have heightened.”
It’s interesting that despite robust growth, animal spirits seem to be drooping. In the services sector, the Business Expectations sub-index, a gauge of business confidence, was in June 2018 at its lowest since last October, when teething troubles with GST were rampant. The Future Output sub-index, a yardstick of sentiment in the manufacturing sector, was also in June at its lowest since last October.
This divergence between present conditions and future expectations could be due to two factors: 1) pessimism about headwinds affecting the macro picture in future, such as higher interest rates, higher oil prices, a weaker rupee, higher inflation, a higher fiscal deficit, trade wars and political uncertainty; and 2) concerns that margin pressures would affect profitability. If sustained, the lower business sentiment could affect investment demand, if companies decide to postpone capital expenditure.
Source : Mint