India’s manufacturing sector activity slips in May, heads towards stagnation: PMI

by mehekkaoberoi

Background:-

  • Manufacturing has emerged as one of the high growth sectors in India.
  • Last year, the swift spread of the coronavirus pandemic came as a heavy blow to the world economy. As the world’s largest manufacturer became the epicentre for the worst pandemic in modern times, stock markets panicked and supply chains from China were severed.
  • The India’s manufacturing sector activity witnessed a significant loss of growth momentum in May due to the intensification of the COVID-19 crisis and its detrimental impact on demand.
  • For consecutive eight quarters manufacturing growth rate has declined, indicating a lack of demand and a deeper structural crisis in the sector worsened by the pandemic-induced lockdowns.
  • Imports of heavy machineries and equipment on which our manufacturing and other industries are crucially dependent has been going down.
  • The import of these capital goods is important for maintaining a threshold on output expansion, as many sectors that feature in India’s major exports are also in India’s top imports.
  • This manufacturing sector activity was largely flat in April, as rates of growth for new orders and output eased to eight-month lows amid the intensification of the COVID-19 crisis
  • The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) was at 55.5 in April,the surge in COVID-19 cases could dampen demand further when firms financials are already susceptible to the hurdle of rising global prices.
  •  In PMI parlance, a print above 50 means expansion while a score below 50 denotes contraction.
  • Looking back, it was not a healthy journey for Indian manufacturers consisting of a large group of MSMEs

Linkages:-

  • The growth of the manufacturing sector was curbed by the escalation of the pandemic and difficulties in securing raw materials, the survey said.
  •  Concerns surrounding the pandemic restricted business confidence towards the year-ahead outlook for production.
  • The share of manufacturing in GDP is  a basic indicator of the significance of the sector in a country’s economy.
  • Also, the traditional stages of development of any country from primary sector to secondary and then to tertiary sector determine the different stages of growth of manufacturing from low to peak and then sliding down, although there remains variations in the growth trajectory as the development process may pursue different routes for economic progress of individual country.
  • The thrust on product development by initiating new technologies, new processes for a large group of manufacturers, instead, paved the way for the simple task of assembling the products from the key components imported from abroad.
  • Technology transfer suffered as well as the initiatives required to pursue the multinationals to set up manufacturing bases in India.
  •  It is a fact that the appropriate policy incentives for technology transfer and setting up of new facilities were not available as exemplified by difficulties of doing business in India. In this context, the call for ‘Atmanirbhar Bharat’, ‘Make in India’,’ Vocal for Local’ appear to set the tone, striking the right chord.
  • An incentive scheme for setting up import replacing items at least for the initial phase is very much necessary across different segments to escalate the role of the manufacturing sector.

Current Scenario:-

  • India’s manufacturing sector recorded the weakest performance in ten months this May.
  • On the marcoeconomic front, India’s economy contracted by less-than-expected 7.3 per cent in the fiscal year ended March 2021 after growth rate picked up in the fourth quarter, just before the world’s worst outbreak of coronavirus infections hit the country.
  • Recently in March 2021 the IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) slipped to a seven-month low of 55.4 from 57.5 in February 2021.
  •  Data for April indicates a slight improvement to 55.5 after declining to a seven-month low in March at 55.4. This marginal increase doesn’t hide the fact that “the headwinds facing manufacturers cannot be ignored.
  • The surge in COVID-19 cases could dampen demand further when firms’ financials are already susceptible to the hurdle of rising global prices.
  • On the job front, although manufacturing employment continued to fall, the rate of contraction recorded in April was marginal and the weakest in the current 13-month sequence of job shedding.
  • Indian policy planners (The Manufacturing Council) had earlier set a target of raising the share of manufacturing to 25% by 2022, but it could remain well-nigh difficult to achieve in two years.
  • India’s GDP for the first quarter of 2020-21 is contracted by 23.9% and the share of the manufacturing sector in total gross value added (GVA)  is 17.5% in Q1. this has effected the Growth rate in the manufacturing sector to -39.3% in Q1 of 2020-21.

Impact :-

  • Because manufacturing has so many substantial links with so many other sectors throughout the economy, its output affects more economic activity across society than any other sector. That’s a major reason manufacturers play such a critical role in growth of the country.
  • The detrimental impacts of the pandemic and associated restrictions seen in the manufacturing sector are considerably less severe than during the first lockdown when unprecedented contractions had been recorded.
  • Due to COVID-19 crisis the demand also impacted which leads to loss of growth in manufacturing sector.
  • Growth projections were revised lower, as firms became more worried about the escalation of the pandemic and local restrictions.
  • The overall degree of optimism towards the year-ahead outlook for output was at a ten-month low, a factor which could hamper business investment and cause further job losses,”
  • There was also a substantial slowdown in growth of input purchasing Power of manufacturers.

Content contributed by- Vaishnavi Dahivalikar

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