Manufacturing output showed the strongest month-on-month improvement in nearly a year driven by stronger demand, especially for consumer and intermediate goods.
After the release of September quarter GDP numbers, which were worse than expected, here’s some good news on economic growth. The November Nikkei purchasing managers' index (PMI) for the manufacturing sector rose to 54 from 53.1 in October. That is the highest in 12 months and signals a robust improvement in the health of the sector. Indian manufacturers are now confidently predicting better sales in the months ahead.
Manufacturing output showed the strongest month-on-month improvement in nearly a year driven by stronger demand, especially for consumer and intermediate goods. But here's the catch. Firms also confidently increased their output prices, which rose the highest in 21 months, which signals the return of pricing power as firms were able to pass on higher costs to consumers, adding to inflation risks. The rebound in demand will also keep core inflation high. On the other hand, the rise in input prices moderated.
How do these numbers square up with the recent GDP data?
The GDP numbers are backward looking. There was clearly a slowdown seen in the September quarter, driven by consumption as high oil prices and the rural distressed hit demand. The festival season also wasn’t particularly good with sales falling short of expectations. However, the latest PMI data seems to suggest that is changing.A rise in manufacturing output and pricing power plus the sharp fall in oil prices, if it sustains, can act as a tailwind to growth in the second half of the year. With the rise in manufacturing pricing power, adding to inflation risks, and growth recovering, the Reserve Bank of India's rate setting committee will likely stay the course on "calibrated tightening" rather than cut rates as some have predicted.