Moneycontrol Pro Panorama | Economy is expanding, but…

Both manufacturing and services sectors are plagued by inflationary pressures

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The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.

Business activity in India’s services sector reached the highest level in 11 years on improvement in demand and capacity expansion. The S&P Global India Services Purchasing Managers Index (PMI) rose to 59.2 in June, from 58.9 in May. Work intake rose substantially. Encouragingly, service firms are securing new orders despite charging higher prices.

Conditions are not so upbeat in the manufacturing sector. The manufacturing PMI eased to 53.9 in June, from 54.6 in May. Factory orders, production and exports grew at a slower pace. Both manufacturing and services sectors are plagued by inflationary pressures. However, input cost inflation is playing a more restrictive role in constraining manufacturing sector growth.

For instance, channel checks by equity analysts indicate an incremental improvement in demand for cement in June. But companies are unable to increase prices due to abundant supplies.

“As for selling prices, a faster increase at services firms contrasted with a slower rise at goods producers,” S&P Global said in a note.

Demand trends also have a regional flavour. Reopening of business centres, fresh hiring and return to office employees are strengthening demand in urban centres. Comparatively, activity in rural areas is seeing no major boost.

The recently released June automobile sales numbers reflect this divide. Two-wheeler sales are subdued. In passenger vehicles, demand is seen to be driven by higher priced new products, utility and electric vehicles rather than entry-segment cars. This indicates poor mass consumption, warn analysts at Nomura research. Sales of tractors lagged on year-on-year basis. A good monsoon season and healthy kharif crop remain vital for rural demand.

“The rural economy has been a contrast to urban recovery, despite good monsoon/agri output in 2021. The reason for this is likely weak transfer payments from urban to rural,” add analysts at Jefferies India.

There is some good news in this week's recovery tracker update. Consumer sentiment and unemployment data reflected an improvement in rural areas and urban areas as well, and if that sustains in the coming weeks, then that could give some reason for cheer. Read here for more.

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