Ukraine war-induced commodity price spike could derail mfg rebound in India
India’s manufacturing activity picked up in February as state governments lifted Covid restrictions with waning of the third wave while favourable demand conditions supported an improvement in sentiment which reached the strongest since last October. However, a spike in commodity prices owing to the unfolding Russia-Ukraine war and likely disruption in overseas shipments may put downward pressure on domestic manufacturing activity.
Data released by the IHS Markit showed India’s Manufacturing Purchasing Managers’ Index (PMI) improved to 54.9 in February after dropping to a four month low at 54 in January as the Omicron variant of Covid-19 spread rapidly throughout the country. A print above 50 is considered expansion while a level below 50 is considered contraction in manufacturing activity.
“Central to the expansion was a faster uplift in new business inflows. Anecdotal evidence pointed to supportive demand conditions and higher sales to both new and existing clients. Similarly, demand from international clients rose moderately and at the quickest pace for three months,” the data analytics firm said.
Rates of expansion picked up at intermediate and capital goods firms but eased at consumer goods makers. Nevertheless, consumer goods was the best-performing sector in February for the third month in a row.
IHS Markit said February’s survey showed a further increase in average input costs faced by Indian manufacturers. “Purchase price inflation was sharp, but softened to a six-month low. Part of this additional cost burden was passed on in the form of higher selling charges, though the rate of increase was modest,” it added.
Retail oil price revisions are expected to resume early March after the Assembly elections are over with Brent crude touching $110 per barrel amid fear of supply chain disruptions from Russia. The price revision is likely to happen in a gradual way though the extent could also depend on whether the government opts for another round of excise duty reduction.
Shreeya Patel, economist at IHS Markit said latest PMI data for India’s manufacturing sector revealed an improvement in operating conditions in February. “There were, however, some key concerns that continued to threaten growth. Most prominently, costs pressures remained elevated as a result of shortages while delivery times lengthened once again. Despite expenses rising sharply, firms passed on only part of this burden to clients, suggesting pressure on profit margins. For now, India’s manufacturing sector has weathered the storm of the Omicron variant, undoubtedly supported by the relatively high inoculation rate. Moreover, demand conditions showed notable signs of resilience and price pressures somewhat receded,” she added.
The Indian economy grew at 5.4 per cent in the third quarter of FY22, according to the National Statistical Office’s (NSO’s) second advance estimates of GDP for 2021-22, released on Monday. This is below the expectations of most economists. The statistics office pared the overall growth forecast for FY22 to 8.9 per cent from 9.2 per cent estimated in January.
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