India’s Manufacturing PMI: Genuine recovery or festive spirit?

Manufacturing PMI data reached a record high for India in October 2020, reflecting pent-up domestic demand, a positive sentiment due to the festive season and optimism on a possible uptick in exports in the coming months.

• India’s manufacturing PMI has risen to a high of 58.9 in October as compared to 56.8 in the previous month, indicating the strongest increase in 13 years.
• Manufacturers seem confident that the surge will continue in the coming months, as businesses are ramping up on input purchases and restocking.
• However, analysts caution that the present trend does not show a sustained recovery, as it seems to be driven largely by festive season and pent-up demand.
• Globally, the recovery is varied across markets, as rising COVID-19 cases and fragile consumer demand in key markets continue to cast a shadow over manufacturing sector recovery.

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India’s manufacturing PMI has risen to a high of 58.9 in October, indicating the strongest increase in 13 years. The corresponding figure on the IHS Markit India Manufacturing Purchasing Managers’ Index in September was 56.8. The index had gone into contraction mode in April this year, after 32 consecutive months of expansion. But it has returned to expansion mode in the past 3 months.

Pollyanna De Lima, Economics Associate Director at IHS Markit, commented, “Levels of new orders and output at Indian manufacturers continued to recover from the COVID-19 induced contractions seen earlier in the year, with the PMI results for October highlighting historically-sharp monthly rates of expansion.”

Manufacturers seem confident that the surge will continue in the coming months, as businesses are ramping up on input purchases and restocking. The same is also attributed to improved demand conditions, and relaxation of COVID-19 restrictions. Companies also seemed hopeful of witnessing the end of COVID-19 cases and reopening of other sectors by the end of the current financial year. On the negative side, adhering to COVID-19 restrictions has led to continued drop in payroll numbers. Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, adds,

Given that PMIs are dependent on the current state of orders, the festive season demand as well as pent-up demand would have contributed to the surge in sentiment as well as production levels. Global demand, which has been recovering faster than domestic demand would also contribute to the strong readings in PMI in September and October.

The recovery trend is also evident from core sector data. Eight core sectors had recorded a decline of 0.8% in September, the lowest contraction since March 2020. Electricity and steel output showed positive growth for the first time since March 2020, while coal improved for the second consecutive month. Cement also showed its lowest decline by 3.5% YOY since March.

New car and SUV sales have witnessed a turnaround in October, a critical indicator of market demand. Maruti Suzuki recorded a growth in dispatches to dealers by 17.63%, while Hyundai and Kia witnessed their highest ever sales numbers. Tata Motors performed even better, showing an increase by 79.33% during the month.

Besides cars, manufacturers have shown confidence in demand growth during the ongoing festive season, in sectors like FMCG, electronics, fashion, health & hygiene products and jewellery. E-commerce firms are expected to benefit significantly from this revival. Research firm RedSeer expects that the gross merchandise volume registered by e-commerce retailers could nearly double to US$ 7 billion in this year’s festive season, compared to US$ 3.8 billion last year. However, Aditi Nayar, Principle Economist, ICRA, Ltd, cautions:

In our view, several sectors are showing signs of an upturn that is being fuelled by pent up demand and inventory building ahead of the festive season, as well as a favourable base effect. Such trends may not sustain after the festive season is over, and momentum may flag after December 2020. We await concrete signs of a durable uptick in demand.

On the other hand, exports are being seen as a possible driver as well for increase in manufacturing activity, as some other countries are recovering at a faster rate. Dr Rucha Ranadive, Economist, Care Ratings, comments:

New orders have highest 30% weightage in PMI that also includes export orders. In October 2020, export orders registered highest rise in the past six year (since December 2014). Globally, many countries have shown signs of economic recovery. The pandemic seems to have contained in some of the Asian economies leading to softer restrictions and opening up of businesses. As a result, the demand recovered paving way for export orders. This has already been seen in September and could have persisted in October.

An uneven global recovery

PMI numbers for the month of October across the world, however, show significant variance across major economies, as shown in the graph.

Brazil has also shown an all-time high PMI OF 66.7 in October, with record-high or near record-high expansion in output, new orders, exports and employment. Currency depreciation improved competitiveness, but also raised the prices of imports and consequently, manufacturing costs.

Germany (58.2) has also shown strong expansion in manufacturing PMI readings, with an all-time high in both domestic and export orders. On the flip side, the rising coronavirus cases in Europe could dampen sentiment, and the recovery for consumer-facing businesses looks weak.

Source: Trading Economics; figures for October 2020, *Composite figure

Manufacturing in the ASEAN region remains in a downturn, with an overall PMI of 48.6. This reflects continued decline in new orders, and production, leading to sustained shedding of jobs. Four of the seven countries showed a deterioration in conditions, with Thailand, Vietnam and Singapore registering improvements.

Russia also showed a weak manufacturing PMI of 46.9 in October, led by weakening domestic demand conditions, fall in output and continued uncertainty wrt the COVID-19 pandemic. The US is relatively stable at 53.4, even as clients have shown reluctance to place new orders till the declaration of the Presidential election results. As expected, China’s manufacturing sector has seen a decade high in October, as people spent quiet liberally on travel, leisure and shopping during the Golden Week holiday.

Sustained recovery in the coming months will be highly dependent on domestic and external demand conditions, and the trajectory of the COVID-19 pandemic. While India seems to be benefitting significantly due to its domestic cushion, export data confirms some increase in manufacturing exports in September 2020 for sectors like engineering goods (8.62%), electronic goods (3.08%), RMG of textiles (13.54%), plastics (9.83%), petroleum products (8.29%). Manufacturing sentiment in October shows that to some extent, companies are confident of this positive trend continuing in the coming months, which could reflect on increase in exports.