There is good news for policy makers as manufacturing activity grew at its fastest pace in two years in December boosted by new businesses and overseas orders. The HSBC India Purchasing Managers' Index (PMI), which provides an overview of manufacturing operating conditions climbed to two-year high of 54.5 in December, up from 53.3 in the previous month. The PMI is an advance indicator and augurs well for the industrial output data in the months ahead. Recent core sector data has shown some improvement in industrial activity after a 4.2% contraction in October.
If the momentum is sustained, it bodes well for overall growth, which the government expects to pick up in the quarters ahead on the back of improving sentiment and investments. The latest data also painted a brighter picture in terms of prices, as inflationary pressures eased during the month. This should provide some headroom for the Reserve Bank of India to ease interest rates and help boost growth. Sharp moderation in inflation has raised the pitch for interest rate cuts.
“A steep rise in new orders from the consumer sector more than offset a slowdown in new order growth from investment goods. In our view, a rise in the latter is critical for a meaningful pick-up in economic growth,” said Pranjul Bhandari, chief India economist at HSBC.
“In line with falling commodity prices over the last few months, input price inflation was modest, and this trend was also mirrored in output prices. With the disinflationary trend gaining ground, RBI is expected to find space for some rate cuts in 2015,” he said.
According to a number of survey participants, the latest rise in production was supported by stronger order books. Data reflected improving demand in December, as new orders increased for the 14th consecutive month. The rate of expansion was marked overall and the fastest since the end of 2012. Similarly, manufacturing companies registered a rise in new export business in December. New work from abroad expanded at the quickest pace since April 2011.
