Indian factory output gathered pace in May as output and new orders rose at the fastest rate since January. Purchasing Managers Index (PMI) rose to a four-month high of 52.6 in May compared with 51.3 in April.
PMI, compiled monthly by global bank HSBC, measures economic health of a sector based on surveys of private sector companies. A reading of above 50 on the index denotes expansion. The manufacturing output in the country expanded for 19th successive month.
While growth was recorded across all three categories, consumer good firms registered the strongest growth. Solid increases were also seen in capital and intermediate goods production, according to the report released by HSBC.
Improved demand from domestic and foreign markets contributed to the higher output in May, although the rate of expansion in foreign demand moderated.
Indian GDP figures released last week showed manufacturing gaining momentum, as India surpassed China in the first quarter of the year to become the fastest growing economy in the world. Manufacturing expanded at 7.1 per cent in the last fiscal, compared with 4.2 per cent in 2013-14.
While the Indian economy has been expanding at a robust pace, there are questions about the sustainability of recovery given the fact that the government has not come up with any big-bang reforms so far.
“The outlook for the sector is, however, clouded by a stagnant jobs market as firms remain uncertain about the sustainability of the upturn," said Pollyanna De Lima, economist at Markit.
The report highlighted the lack of growth on the employment front, despite the uptick in growth. Another disturbing development was a rise in input prices. Even though stronger costs were reported in all three categories and input and output prices increased, they were still lower than historical averages.
“Input cost inflation ticked higher and output prices were raised in May, but inflation rates are nonetheless weak in the context of historical data. This indicates that further rate cuts are still on the horizon,” Lima added.
Markets are expecting the central bank to deliver another rate cut its meeting on Tuesday. In a poll of 18 economists conducted by VCCircle last week, all but two economists expected a rate cut in the meeting. The poll also found markets discounting for another rate cut till December to provide impetus to the economy.