HSBC's India manufacturing PMI rose marginally (51.5 vs. 51.4 in May) thanks to improved output (52.4 vs. 51.7 in May). However, 'new orders' (53.0 vs. 53.2 in May) slowed slightly despite a jump in new export orders in June (55.9 vs. 53.7 in May).
- Quantity of purchases (53.4 vs. 51.8 in May) was stronger, despite the slowdown in order flows. Meanwhile, stocks of purchases (51.2 vs. 49.9 in May) and stocks of finished goods (51.3 vs. 51.0 in May) accumulated at a faster pace.
- Backlogs of work (51.9 vs. 52.3 in May) eased and supplier delivery timeliness (51.1 vs. 50.7 in May) improved. Meanwhile, employment was broadly unchanged (50.3 vs. 50.6 in May) in June.
- Inflation rose, with an uptick in both input (55.8 vs. 54.0 in May) and output prices (52.5 vs. 51.1 in May).
The manufacturing sector does not seem to be in a great hurry, unlike the stock market. Improvement is arriving slowly led by both domestic and external demand. No doubt, stronger business sentiment following a convincing election verdict will trickle down to growth in the future, but it could prove more gradual than widely believed. This is mostly because the economy is supply constrained. Poor monsoons and tensions in the Middle East are other drags on growth in the near term.
In fact, the RBI may prefer the slow track. An unleashing of pent-up demand without a rise in productivity accompanying it will worsen macro-economic imbalances, i.e. inflation and the trade deficit. The fact that input and output prices rose in June even with this meagre improvement in demand says it all. The government must keep this in mind while framing the final budget to be presented on 10 July. A tighter budget now will lead to more sustainable growth in the future.
Supply side issues need to be solved first before switching to a faster growth track. HSBC manufacturing PMI improved at the margin led by output and new export orders. Despite the excitement following the election, growth in the economy will improve only gradually. The economy also needs this time for supply side issues to be sorted out through reforms. Both the RBI and the government must embrace this gradual growth trajectory.
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