August Factory Growth At 29-Month Low On Weak Exports.

NEW DELHI: India's factory output grew at its slowest pace in 29 months in August as exports shrank because the global slowdown, a private survey-based measure of manufacturing activity showed.

HSBC's seasonally adjusted Purchasing Managers' Index (PMI), which reflects acquisition of goods and services based on a survey of over 500 companies, dropped to 52.6 in August from 53.6 in July. It was the lowest since March 2009, when the reading was below 50, indicating contraction.

"The main driver of the weaker reading was a significant contraction in export orders, which are facing stiff global economic headwinds," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

PMI is considered a fairly good indicator of manufacturing activity the world over, but in the case of India, the large contribution of the unorganised sector yields a low correlation with industrial growth. The PMI for June had suggested a drop in manufacturing growth, but the index of industrial production showed manufacturing output expanded 8.7%, a threemonth high.

A similar divergence may play out in July. The index of eight infrastructure industries that have a 37.9% weight in the index for industrial production, or IIP, was at a 15- month high of 7.8% in July. The survey showed the export orders index, a sub component of the PMI, had dropped to 45 from 49.2 in July.

Exports surged by 81.79% to $29.3 billion year-on-year in July despite uncertain economic conditions in the US and Europe. The drop in exports as suggested by the PMI may play out in August. The commerce ministry had warned last month that high exports growth was not sustainable and it expected a drop in orders in the coming months.

India's exports rose 54% in April-July from the year-ago period and had a significant role in first-quarter GDP rising above expectation at 7.7%. The PMI also showed that purchasing activity came down to a 21-month low, while there was a mild reduction in employment within the manufacturing sector.

Data also showed manufacturing continued to face pricing pressure, with input prices rising at the fastest pace in four months.

"The numbers suggest moderation, rather than a collapse, in growth and they confirm that inflation remains the primary policy concern," Eskesen said.

Experts say that with a slowdown in demand, high input prices are likely to cap profits.

"With overall demand slowing, margin pressures might emerge," said Yes Bank chief economist Shubhada Rao.

Source : economictimes.indiatimes.com