The Indian manufacturing sector suffered its first contraction in the survey history during November, according to the latest data from ABN AMRO, with levels of production and incoming new orders both down sharply. A significant reversal in the strength of the domestic market was the principal factor underlying the weaker performance of manufacturing, as tighter credit conditions and the onset of the global economic downturn hit confidence and reduced clients’ willingness to commit to new spending.
The headline ABN AMRO Purchasing Managers’ Index (PMI) – a seasonally adjusted index designed to gauge underlying sector conditions – plunged to a record low of 45.8. This is the first occasion in the history of the survey that the PMI has fallen below the neutral 50.0 mark.
November data was consistent with a broad slump of the manufacturing sector, with all except one of the indexes covered by the report falling to series record lows and posting levels well below peaks seen during mid-year (the exception being suppliers’ delivery times).
On the prices front, the latest data signalled that average input costs and output prices had fallen for the first time in their respective series histories in November. The decline in both of these variables was mainly driven by the current weak market conditions and lower commodity prices. There were also some reports of firms lowering their average charges in response to increased competition.
November data provided further evidence that capacity pressures were easing in the manufacturing sector. Backlogs of work declined at a survey record rate, as companies diverted resources made available as a result of the drop in new orders towards completing existing contracts.
Meanwhile, average vendor performance improved for the second successive month and to the greatest extent for over two-and-a-half years. Where shorter lead-times were reported, this was generally attributed to reduced demand for raw materials.
Purchasing activity declined for the first time in the survey history during November, as manufacturers cut input buying in line with reduced production requirements. Part of the decline in purchasing reflected a preference amongst firms for lower inventory holdings.
Commenting on the latest survey findings, Gaurav Kapur, Senior Economist, India, ABN AMRO N.V. said: “The grim scenario in the manufacturing sector is clearly visible from the November PMI survey reading and details. For the first time since the series started, the headline PMI has fallen below 50, to 45.8, signaling a contraction in overall activity. That has come mainly on the back of a decline in output during the month along with a sharp deterioration in demand conditions. This contraction in activity levels was not entirely unanticipated, as the October PMI data and other anecdotal evidence painted a rather bleak picture of operating conditions in the sector.
“The new orders index, an indicator of the strength of demand conditions, dipped sharply to 43.2 in November from 54.4 in October. New export orders also saw a second successive month of contraction, as most of the developed economy markets are firmly into a recession now. But even as external demand shrunk, it appears that much more rapid domestic demand destruction occurred in November. A local liquidity crisis which has developed on the back of the ongoing global financial market turmoil appears to be adversely affecting real activity and sentiment now.
“Contraction was also seen in both the input and output price indices. The input prices index registered a particularly steep decline on the back of the ongoing downward correction in commodity prices, especially crude oil. Output prices index also dipped below 50, but the fall was relatively smaller in magnitude. These are good signs which indicate that inflation came off at a brisk pace in November. That should allow for easing the monetary levers further in order to counter the pressures on growth.”
