India Manufacturing Activity Showing Strong Growth

March 5, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – Manufacturing activity in India posted its strongest output and growth figures in a year last month, reaching 52.5 on HSBC’s Purchasing Managers’ Index (PMI).

In contrast, China’s manufacturing PMI fell for the third month straight to 48.5 in February according to HSBC. China’s low manufacturing numbers mirror official PMI figures which fell to an eight-month low of 50.2 in February.

India’s encouraging PMI figures come alongside headlines earlier this week that overall Indian economic growth slowed slightly from 4.8 to 4.7 percent last quarter (October – December) in a blow to the incumbent Congress Party’s election prospects. Further negative number released last week indicated output in India’s eight core industries slowed to 1.6 percent in January after a slowdown in coal, natural gas and refinery product outputs.

According to HSBC, however, India’s rising PMI is indicative of an overall improvement in business conditions across the country’s goods-producing sector and a rise in incoming work.

“Manufacturing activity picked up further in February. New order flows have firmed, with improvement in external demand and the reduction in macroeconomic uncertainty since last summer. This, in turn, has provided a lift to output growth,” remarked Leif Eskesen, Chief Economist for India & ASEAN at HSBC.

“However, the recovery in activity is still likely to prove protracted given the lingering structural constraints. Moreover, underlying inflation pressures remain potent, which was evident from the jump in the input price component of the PMI survey. This will keep RBI [the Reserve Bank of India] hawkish and likely compel it to raise rates a bit further this year,” Eskesen added.

Consumer goods were the best performing subsector overall and operating conditions improved for intermediate goods producers, but were unchanged in the capital goods category.

After a government panel was set up to approve stalled projects last month, performance in the consumer goods subsector is expected to continue into March.

Manufacturing employment also increased in HSBC’s February data, extending the current period of job creation for the fifth straight month. Despite this, however, payroll numbers rose at their slowest pace in a decade with the exception of 2009.

These slow salary increases may contribute to a shift in manufacturing from China to India as the cost of manufacturing in China continues to rise steadily.

“We are starting to see the impact of India’s worker dynamics coming into play, and the status of India showing consistent positive growth in manufacturing activity for export orders will be the new normal as the country takes on the mantle of low cost production for the global supply chain,” commented Chris Devonshire-Ellis of Dezan Shira & Associates.

In tandem with India’s healthy PMI figures, exports also rose 3.8 percent in January to US$26.75 billion – up modestly from a 3.5 percent increase in December.

HSBC’s India Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 500 manufacturing companies.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam in addition to alliances in Indonesia, Malaysia, Philippines and Thailand as well as as well as liaison offices in Italy and the United States.

You can stay up to date with the latest business and investment trends across India by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.

Related Reading

Taking Advantage of India’s FDI Reforms
In this issue of India Briefing Magazine, we explore important amendments to India’s foreign investment policy and outline various options for business establishment, including the creation of wholly owned subsidiaries in sectors that permit 100 percent foreign direct investment. We additionally explore several taxes that apply to wholly owned subsidiary companies, and provide an outlook for what investors can expect to see in India this year.