India's factory activity growth slowed significantly in May as an escalation in coronavirus cases whacked new orders and output while scarcity of raw materials drove up input costs, a private sector survey showed on Tuesday.
Although daily infection rates have started falling in the past few days there are concerns about underreporting of cases due to a dearth of testing in rural areas.
India has already reported around 28 million coronavirus cases and over 300,000 deaths, leading many states to impose restrictions affecting economic activity.
The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, fell to 50.8 in May from 55.5 in April, its lowest since July 2020. That was only just above the 50-mark separating growth from contraction.
"Key gauges of current sales, production and input buying weakened noticeably in May and pointed to the slowest rates of increase in ten months. In fact, all indices were down from April," noted Pollyanna De Lima, economics associate director at IHS Markit.
"That said, 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."
The output and new orders sub-indexes fell to their lowest levels since July last year.
Some of that meager expansion was driven by producers completing pending projects and backlogs of work declined for the first time in over a year.
With activity weak, firms reduced headcount for the 14th consecutive month and IHS Markit said close to 5% of companies shed jobs.
Despite softening to a four-month low, input price inflation remained sharp, with the strongest rise noted in the consumer goods segment. Only some of that burden was passed on to buyers.
The Reserve Bank of India, however, is expected to hold interest rates this fiscal year, supporting an economy struggling with a devastating second wave of the virus, a recent Reuters poll showed.
The economy expanded 1.6% in the Jan-March 2021 quarter year-on-year.
Business expectations fell in May as companies were concerned about the lingering impact of the pandemic on activity although it did remain positive.
"The overall degree of optimism towards the year-ahead outlook for output was at a 10-month low, a factor which could hamper business investment and cause further job losses," added De Lima.