India's manufacturing growth bounces back from July's contraction

New Delhi: Manufacturing in India bounced back in August from previous month's GST-related contraction amid resumed growth in new orders, production and employment, a survey said today.

The Nikkei India Manufacturing Purchasing Managers' Index (PMI) rebounded to 51.2 in August from a low of 47.9 in the previous month, indicating a substantial turnaround from July's GST-related contraction.

A reading above 50 indicates expansion, while a score below this mark means contraction.

"August's PMI results showed that manufacturers in India recovered quickly from the sharp slump that followed the introduction of the Goods & Services Tax," said Pollyanna De Lima, Principal Economist at IHS Markit and the author of the report.

All the three monitored sub-sectors posted substantial recoveries, with capital goods outperforming its consumer and intermediate goods counterparts in terms of production growth rates, the survey said.

Moreover, to cope with higher workloads, manufacturers hired extra staff at the fastest pace since March 2013.

"In July, firms indicated that orders, production and purchasing had been postponed due to a lack of clarity about the new tax regime, but they have now been resumed as manufacturers, suppliers and their clients have become more knowledgeable of the GST rates," Lima added.

On the price front, input cost inflation softened to a one-year low as the introduction of the GST reportedly led to higher prices for some materials and cheaper rates charged for other items.

"Output charges were raised marginally and at a rate that was muted in the context of historical data," Lima said.

Going forward, Indian manufacturers remained cheerful around growth prospects, but concerns about the possibility of unexpected policy decisions weighed on confidence and the level of sentiment fell from July's 11-month high.

"After a loss of momentum in fiscal year (FY) 2016, IHS Markit forecast the Indian economy to recover marginally in FY 2017, with real GDP growth expected at 7.3 percent," Lima added.

India's economic growth slipped to a three-year low of 5.7 percent in April-June as disruptions caused by demonetisation spilled over to the third straight quarter amid slowdown in manufacturing activities.

GDP expanded by 6.1 percent in the preceding quarter.