Manufacturing sector in India contracted in July following the GST launch as new orders and output dropped for the first time since the downturn in December last year post demonetisation, a survey said on Tuesday.
This contraction is going to sharpen calls for a lowering of interest rate by the RBI at its policy meet, starting Tuesday.
The Nikkei India Manufacturing Purchasing Managers' Index (PMI) stood at 47.9 in July, down from 50.9 in June, its lowest mark since February 2009, and highlighted the first deterioration in business conditions in 2017 so far.
A figure above 50 denotes expansion while any reading below this level means contraction.
"Manufacturing growth in India came to a halt in July with the PMI down to its lowest mark in almost eight-and-a-half years amid widespread reports that the sector has been adversely affected by the implementation of the Goods and Services Tax (GST)," said Pollyanna De Lima, principal economist at IHS Markit and author of the report.
The GST launch, the survey noted, affected demand. The reductions in output, new orders and purchasing activity were all the steepest since early 2009.
"The weakening trend for demand, relatively muted cost inflationary pressures and discounted factory gate charges provide powerful tools for monetary policy easing, which has the potential to revive economic growth," Lima said.
In the monetary policy review on June 7, the RBI left key rates unchanged, with Governor Urjit Patel noting that the central bank wanted to be more sure that inflation will stay subdued.
Discouraged by the downturn in factory orders, companies lowered production in July. The fall ended a six-month sequence of growth, and the rate of reduction was the most pronounced since the global financial crisis.
Going forward, Lima said, upcoming PMI releases will show whether underlying conditions remain on the downside or if July's contraction was a temporary blip.
Panelists said lack of clarity regarding tax rates caused confusion among suppliers and manufacturers themselves.
The 12-month outlook for output remained positive in July, with companies expecting more clarity about GST to support growth.
However, foreign demand for India-manufactured goods improved in July as new export orders continued to rise. That said, the rate of expansion softened from June's eight-month high, the survey stated.