• HDFC securities
• 11 May 2018

Signs of a recovery, albeit small, are now visible.

 

April 2018 witnessed an improvement in the country’s manufacturing realm, with a surge in fresh orders and capacity expansion for the ninth consecutive month. The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) rose from 51 to 51.6 in April 2018, marking a modest improvement. An index above 50 shows expansion and indicates contraction if it is below 50.

 

Following a survey conducted amongst purchasing managers in over 400 manufacturing companies, a report was released. This reflected growth in expansion starting March 2018.An increase in manufacturing and production encouraged job creation, and also brought about a surge in the procurement of raw material and other necessary inputs.

 

No inflation issues

 

Inflation continued to be on the lower side in April 2018. This consequently led to a dip in both input and output manufacturing costs, bringing them to the lowest point since approximately a year ago.

 

Though a sturdy rise in output and favorable demand conditions were the main drivers for the rise in the headline PMI index, pulling it up from March 2018’s five-month low, it still came in slightly below average.

 

Optimism Prevails

 

Since March 2018, the start of new businesses accelerated for the sixth consecutive month. Though not robust, this brought about a notable increase in clients. Fresh overseas orders increased marginally for the sixth successive month in April, though the rate of expansion was the weakest since November 2017.

 

Another key reason for the level of optimism to remain strong is the belief that business conditions will improve, following the transition into the Goods and Services Tax regime.

 

Services Sector: Similar Impact

 

According to a study by research firm Markit, job creation in the services sector, grew substantially, showing an uptick in demand. This contributes about 60% to India’s US$ 2.3tn economy. A marked improvement was also witnessed in the country’s services sector for the second consecutive month in April 2018. Growth in employment was the highest since March 2011.

 

According to the study, confidence in the country’s services sector remains robust. The Nikkei India Services Purchasing Managers’ Index rose to 51.4 last month, the highest level since January 2018, as the inflow of new orders propelled growth. The Index stood at 50.3 in March 2018 after dipping to 47.8 in February 2018.

 

Here again, a reading above 50 indicates economic expansion, while a reading below 50 signals contraction.The cost burden in the services sector rose in April. ‘Respondents linked higher raw material cost to increased prices for food and transport to the rise in cost,’ the report stated.
The services sector plays a pivotal role in job creation. There was a marked improvement in this sphere, reflecting an uptick in the country’s demand, the research firm’s statement said.

 

With both manufacturing and services PMI registering an increase, the Nikkei India Composite PMI Output Index rose from 50.8 to a three-month high of 51.9 in April 2018. Optimism is robust and mirrors expectations that there will be a surge in fresh businesses and demand in the next 12 months. The factor to look out for is persistence in these favorable numbers.