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PMI data indicates September quarter likely to be a washout

LiveMint logoLiveMint 06-09-2017 Harsha Jethmalani

Hopes that the current quarter would see a revival in business activity have been dashed by the latest Purchasing Managers’ Index (PMI) data. The Nikkei India Composite PMI Output Index, a measure of private sector activity in both the manufacturing and services sectors, came in at 49 for August (Chart 1).

Graphic: Mint

Note that this yardstick was at 46 in July, which means activity had already contracted from the June level. The pace of the decline, though, has slowed.

Disappointing June-quarter GDP (gross domestic product) growth data showed that Indian businesses suffered while transiting to the new tax regime at a time when they had hardly recovered from the demonetization shock. With the composite PMI showing contraction in activity for the first two months of the quarter, it’s likely that September quarter GDP growth too will be weak.

The services PMI contracted for the second consecutive month in August as business activity and new work orders were impacted by the goods and services tax (GST), although the reading improved from 45.9 registered in July to 47.5 in August.

A reading above 50 indicates economic expansion, while one below 50 points means contraction.

The good news is that factory activity expanded in August. The manufacturing PMI rose to 51.2 in August from 47.9 in July.

“In July, firms indicated that orders, production and purchasing had been postponed due to a lack of clarity about the new tax regime, but they have now been resumed as manufacturers, suppliers and their clients have become more knowledgeable of the GST rates,” said Pollyanna De Lima, economist at IHS Markit.

This factor could have also contributed to an expansion in new orders for the manufacturing sector in August (Chart 2).

Graphic: Mint

New business in the services sector, however, continued to contract, albeit at a more sedate pace.

After rising in July, Business Expectations Index for both manufacturing and services sectors declined in August (Chart 3). Some of the optimism about longer-term prospects seems to be wilting under the strain.

Graphic: Mint

De Lima points out, though, “It’s not all doom and gloom, however, as activity, new business and employment showed much slower rates of reduction than those noted in the prior survey period.”

Nevertheless, the September quarter too is likely to be a washout as far as economic revival is concerned.

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