Mumbai: Despite contraction in manufacturing sector for the last three months, inflationary pressures continue to rise sharply, indicating stagflation-type scenario in the economy, a report said on Friday.
"Even with a negative output gap, inflationary pressures are rising sharply, suggesting a stagflation-type scenario in the economy," Nomura said in a report today.
HSBC's manufacturing Purchasing Managers Index (PMI) for October stood at 49.6, unchanged from September, indicating contraction in activities as it is below 50. This is the third consecutive month of contraction in the PMI.
HSBC's chief economist for India and Asean, Leif Eskesen said: "Input price inflation accelerated further despite the weak growth backdrop, as the effects of the depreciated exchange rate continue to pass through."
Nomura said the input price index in October rose to a 16-month high of 64.5 from 63.5 in September, continuing the steep uptrend of the last four to five months.
The rupee also has appreciated over the past two months, yet the continued rise in input costs suggests broader cost pressures, the report said.
The output price index rose to 55.3 from 51.1, suggesting that firms have started to pass higher input costs on to consumers to protect margins, the report said.
Nomura said with the manufacturing PMI averaging at 49.4 in Q3, the October data suggests that Q4 is also starting on a weaker note.
"Exports and agriculture growth will be a tailwind, but domestic consumption and investment are likely to remain weak due to pro-cyclical fiscal and monetary policies," the report said.
Nomura said it expects that growth may not fall much, but neither will it rise substantially, indicating a very prolonged period of sub-par growth.
HSBC's manufacturing PMI said reflective of a sustained reduction in order books, manufacturers lowered their production volumes in October.
Export orders rose to 52.3 in October from 46.2 in September, due to a weaker rupee and improved external demand.
However, domestic new orders fell to 48.9 in October from 49.6 in September, remaining in the sub-50 contraction zone for a fifth consecutive month, the report said.
"Domestic demand remains weak, but cyclone Phailin also led to lower orders this month," Nomura said. Even as new orders fell, inventories rose in October.
"As a result, the new orders-to-inventory ratio fell to 0.94 in October, the lowest since January 2009, from 0.98 in September, suggesting scope for manufacturing output to be cut further as firms may need to destock inventory if demand does not recover," Nomura said.
The report said despite lower new orders, backlogs of work rose to 52.6 in October from 50.7 in September, due to power cuts.