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ABN Amro April index points to manufacturing recovery

May 05, 2009 03:56 IST
Indications of a revival in domestic demand emerged on Monday, with the monthly ABN Amro Purchasing Managers' Index crossing 50 for the first time since October 2008.

The latest PMI reading is the highest in seven months and it has steadily risen after hitting a trough of 44.4 in December last year.

A reading below 50 indicates that the manufacturing sector, which constitutes nearly 18 per cent of India's gross domestic product, is declining, whereas any number above 50 points to expansion. The greater the divergence from 50, the greater the rate of change. For example, a reading of 45 against 49 would mean that manufacturing has contracted at a faster pace. Similarly, a reading of 60 compared to 53 would mean expansion is taking place at a faster pace.

ABN Amro spoke to about 500 purchase executives in various industries for this survey.

"The April PMI gives a very clear indication that business conditions in the manufacturing sector have improved significantly after a period of sharp contraction and gradual stabilisation," said Gaurav Kapur, senior economist, India, ABN Amro, in a statement.

Overall, eight of the 12 indices crossed the 50 mark in April, which can be considered strong pointers to sustained recovery. The new orders index also crossed 50 in April for the first time since October last year, pointing to a marked growth of new business across India's manufacturing economy. The index capturing new export orders crossed the threshold 50-point mark for the first time since September 2008.

"The domestic orientation of the improvement in demand is clearly visible from the new orders index rising well above 50, even though external demand also improved modestly," said Kapur.

Even as local demand picked up, however, the firms surveyed reported an increase in input prices but claimed they were unable to raise factory gate prices because of competitive pressures. This is the first time input price inflation has been recorded in India's manufacturing sector since October last year. Increased prices for certain commodities and unfavourable exchange rates led to a moderate rise in input costs during April.

As demand improves, Kapur said manufacturers could be in a position to graudally raise output prices too. Therefore, inflationary conditions in the economy, which are currently beinign, could see some upward pressures going forward, he added.

Employment levels across India's manufacturing economy, however, saw a marginal change.

After accounting for seasonal influences, the employment index registered just below the neutral threshold of 50. Where workforce rationalisation was reported, firms mostly commented on the need to cut costs.

ABN Amro's April PMI broadly corroborates UBS's lead economic indicator (LEI), which climbed for a third consecutive month in March 2009, pointing to recovery in industrial activity by June this year.

Coincidently, the CLSA China manufacturing PMI also crossed the 50-point mark, signalling expansion after a gap of nine months. The improvement in China's PMI is attributed to successful investment stimulating measures by the Chinese government coupled with a sharp improvement in export orders pushed the PMI into positive territory, said Eric Fishwick, head of economic research at CLSA.

BS Reporter