Raw material shortages and rising input prices remain short-term risks
Highlighting India’s sustained economic recovery, the Manufacturing Purchasing Managers Index (PMI) for September 21 fell to 53.7 from 52.3 on August 21, with an average of 53.8 in the second quarter of Fiscal 22 vs. 51.5 in the first quarter of FY 22. In a scenario of improving demand, new orders in the domestic and international market improved from the previous month, prompting manufacturers to significantly increase overall production ahead of the festivities and to replenish inventory levels. In order to take into account the increase in sales and production levels, the pace of input purchases has also improved considerably. However, raw material shortages, rising fuel prices and rising transportation costs pushed input cost inflation to a five-month high. While many companies have started to pass cost increases on to consumers, this is at a slower pace given the nascent recovery in demand.
Surprisingly, Services PMI edged down to 55.2 in Sep-21, from an 18-month high of 56.7 in Aug-21. Nonetheless, the index remained well above its long-term average due to accommodative market conditions and improving aggregate demand. While further easing of foreclosure restrictions coupled with service provider marketing efforts boosted domestic activity, travel restrictions continued to weigh on international demand for Indian services. Employment in the service segment increased after a 10-month hiatus, however, several companies indicated that they had adequate capacity to meet current demand, suggesting that employment in the service sector may experience a late recovery. . On the price front, the average cost burden on businesses remained high despite a marginal drop on September 21 due to higher retail prices for fuel, materials and transportation, leading to weakening confidence business to some extent.
Amid an almost complete loosening of foreclosure restrictions and a gradual recovery in demand, the manufacturing and services PMI figures have posted healthy expansion for the past two consecutive months. We expect the trend to continue in the second half of FY22 due to the start of the holiday season, steady progress in vaccination, the lower likelihood of a third wave of severe Covid as well. than pent-up demand for goods and revenge on spending on services. However, persistent inflationary pressures and commodity shortages could pose a downside risk to the PMI path.