Jul 13, 20212 min read

India’s manufacturing sector contracts in June; first time in 11 months: survey

India's manufacturing industry slid back to a decline in June, as per the IHS Markit Manufacturing Purchasing Managers’ Index (PMI), which fell to 48.1 in June from 50.8 in May, marking the first time since July 2020 that the index fell below the no-change mark of 50.

Companies were at their least optimistic for almost a year and jobs continued to be shed for the fifteenth month in a row, the firm said in its India PMI statement. Buying levels fell at a marked pace that was among the fastest seen since PMI data collection started in March 2005, as weak demand and a reduction in production requirements led firms to restrict input purchasing in June.

COVID-19 restrictions also curtailed international demand for Indian goods, and new export orders decreased for the first time in ten months, albeit modestly, the statement pointed out. The strict containment measures to cope with the second wave of COVID-19 negatively impacted demand and led to renewed contractions in factory orders, production, exports and quantities of purchases.

“Companies became increasingly worried about when the pandemic will end, which resulted in downward revisions to output growth projections. As a result of subdued optimism, jobs were shed again in June,” said Polyanna De Lima, Economics Associate Director at IHS Markit.

“Out of the three broad areas of the manufacturing sector monitored by the survey, capital goods was the worst-affected area in June. Output here declined at a steep rate due to a sharp fall in sales. The sector also saw the fastest contraction in buying levels,” she added.

While pre-production as well as post-production inventories declined at manufacturing units, pre-production stocks contracted for the first time in ten months.

“Falling new orders, business closures and the COVID-19 crisis triggered a reduction in output among Indian manufacturers. The decline was moderate relative to those seen in the first half of 2020, but ended a ten-month sequence of growth,” the statement said.

“The intensification of the COVID-19 crisis in India had a detrimental impact on the manufacturing economy. Growth of new orders, production, exports and input purchasing was interrupted in June as containment measures aimed at bringing the pandemic under control restrained demand. In all cases, however, rates of contraction were softer than during the first lockdown,” Ms. De Lima said.

ICRA chief economist Aditi Nayar, however, said the dip in the June PMI is somewhat at odds with the mostly positive high frequency data available so far.

"Following the phased unlocking, GST e-way bills, vehicle registration, electricity demand and petrol consumption have all reported a sequential improvement over May 2021 and a year-on-year growth in June 2021. While diesel consumption has contracted on a year-on-year basis in June, this is likely to be on account of high prices diverting some freight to the railways," she said.

The PMI is compiled by IHS Markit based on responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers. The responses for June’s index were collected between June 11 and June 24.