Aug 19, 20212 min read

India’s economy shows signs of recovery as factory activity rises in July

India’s economy has shown signs of recovery in July as factory activity rebounded on the back of rising domestic and international demand. The recovery in manufacturing has prompted companies to create new jobs after a deadly second wave of the Covid-19 pandemic disrupted the economy.

The Manufacturing Purchasing Managers’ Index (PMI), compiled by IHS Market, jumped to 55.3 in July from 48.1 in June. It may be noted that anything above the 50-level is considered as growth.

IHS Market’s survey confirmed that output rose at a robust pace, with over one-third of companies noting a monthly expansion in production as business rebound and Covid restriction ease.

"Output rose at a robust pace, with over one-third of companies noting a monthly expansion in production, amid a rebound in new business and the easing of some local COVID-19 restrictions," said Pollyanna De Lima, economics associate director at IHS Markit.

ECONOMIC REBOUND AFTER 2ND WAVE

The rebound in factory activity comes after a deadly second wave of Covid-19 in April and May. A fall in active Covid-19 cases led to a significant easing of restrictions in July, allowing businesses to ramp up manufacturing activity.

While manufacturing activity has rebounded, concerns remain over a looming third wave of the pandemic as the country is still reporting more than 40,000 cases per day. Even them, the re-opening of the economy has led to higher demand and sales.

Exports have also witnessed a healthy rise as orders grew at the fastest rate since April. Employment has also increased for the first time since March 20, breaking a 15-month chain of job shedding. However, the pace of hiring remains mild and the country’s job crisis is far from over.

WILL RECOVERY MOMENTUM LAST?

The economic recovery after the second wave may lose momentum if the country witnesses another round of Covid surge. Cases are already rising sharply in a few states, prompting experts to issue caution against a third wave in the country.

Rising inflation is another major hurdle in the path of economic recovery. A recent poll conducted by news agency Reuters signals a further rise in inflation due to higher fuel prices.

Meanwhile, lack of raw material availability and high freight charges are likely to drive input costs even higher. Although companies seem to have absorbed a bulk of the input cost burden to stay competitive, a further rise in manufacturing expenses could force them to hike consumer prices.

"With firms' cost burdens continuing to rise, however, and signs of spare capacity still evident, it's too early to say that such a trend will be sustained in coming months," added De Lima.

Given the uncertain economic situation, the Reserve Bank of India is unlikely to alter key interest rates at its bi-monthly monetary policy review later this week.