Religare Institutional Research | India Economics: India July Mfg. PMI at 50.1 - Downtrend continues; worse times ahead

India July Mfg. PMI at 50.1
Downtrend continues; worse times ahead
India’s mfg. PMI at 50.1 in July is now barely above the 50-mark,
down from 50.3 in June. Output and new order growth continue to
fall on slowing export orders, with the weak INR raising
inflationary pressures. The RBI’s recent rate-based measures to
curb FX volatility will take time to show results, if any, and a
calibrated rollback, as intended by the central bank, looks unlikely
at least over the next two quarters. We now expect a rate cut only
by Q4 (25bps at best) depending on global macro dynamics.
Growth implications are obvious; we see downside risk to our
FY14 industrial estimate of 3.0%.
A quick look at global mfg. PMI data signals a mixed bag with
Eurozone, Germany and the US showing improvement, while all
other regions recorded declines.

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 India PMI falls to 50.1 in Jul’13: India’s manufacturing PMI for July fell
furtherto 50.1 (vs. 50.3 in June) led by a fall in growth of output and
new orders, thanks to slowing export orders. Inflationary pressures
have resurfaced as the currency weakens further. As such, we expect
the RBI to continue with its tightening stance for the next two quarters
at least.
 Eight-core grows at a muted 0.1% in Jun’13: India’s eight-core sector
(37.9% of the IIP basket) grew by a mere 0.1% in Jun’13, with a sharp
drop seen in Electricity but a meaningful rise in Fertilizer production
levels. In Q1FY14, eight-core grew at 1.6%YoY, a sharp drop from the
6.9% growth witnessed in Q1FY13, signaling a much bleaker economic
outlook now.
 Global PMI’s a mixed bag: China:Operating conditions declined at the
fastest pace since Aug, and pressures on the labourmarket remain.
US:Growth at 1.8% in Q2CY13 was better-than-expected but still
remains muted, with weaker exports and employment growth.
Japan: Yen weakness continues to support export growth, but imports
suffer due to rising input costs. Russia: Manufacturing business
conditions deteriorated further along with weakness in the labour
market. Germany:High demand in auto and domestic construction
offset weakness in the export market. Eurozone: With Germany and
France reporting better PMI numbers, hopes for growth revival
improve, albeit marginally. Brazil: Manufacturing sector weakened
further with inflationary pressures increasing on rising input costs.

Eight-core sector grows at 0.1% in Jun’13…
…FY14TD growth remains weak at 1.6%YoY
Eight-core sector production grew by 0.1% YoY in June, a sharp decline from the revised
2.3% reported in May. Historical revisions continue in the Refinery products and Cement
sectors for the months of Apr’13 and May’13, but overall index growth remained
unchanged. This translates into eight-core sector growth of 1.6% in Apr-Jun’13, which is
sharply lower than the 6.9% growth seen in the corresponding period last year. The weak
macro outlook implies bleak, lacklustre growth for the industrial sector and we maintain
our FY14 GDP growth estimate at 5.3% for now, with risks on the downside.
 Sectors showing positive growth: With almostflat growth in June, there was little
positive news from the eight-core industrial sectors. The only sector that has shown
meaningful improvementis Fertilizers, where production is up 11.3%YoY from a
decline of 1.9%YoY in the previous month. Also, Refinery production levels have
been revised up for Apr’13/May’13 from 5.6%/5.1% to 6.0%/5.5%.
 Sectors showing negative growth: Natural gas/Crude oil improved in Jun’13 but still
saw a decline in growth of 16.7%/0.5%. Electricity clocked a sharp dip from 6.2% in
May to -1.3%YoY in June, while downward revisions for the Cement sector continue
in Apr’13/May’13 from 8.3%/2.9%% to 5.2%/2.4%.
 A slow macro recovery ahead: While inflationary pressures have eased, concerns on
growth remain as the industrial sector has weakened sharply with IIP at -1.6%YoY in
May’13 (eight-core: 37.9% of IIP). We don’t expect any quick recovery in the
near-term and maintain our FY14 GDP growth estimate at 5.3% for now, with
downside risks.