Manufacturing growth slips in July, weakest since Nov

Last Updated: Wed, Aug 01, 2012 06:14 hrs
An employee works inside a tea producing factory at the Amchong tea estate in the northeastern Indian state of Assam

Shrinking export orders and sluggish output dragged Indian manufacturing growth in July down to its weakest pace since last November, a business survey showed on Wednesday.

The HSBC manufacturing Purchasing Managers' Index (PMI), which gauges business activity at India's factories but not utilities, fell to 52.9 in July, from 55.0 in June - its biggest one-month drop since September last year.

Still, the index has remained above the 50 mark that divides growth and contraction for more than three years.

With clear signs the global economy is slowing, export orders fell slightly for the first time in nine months.

Electricity outages across India over the last month also crimped production while factories were without power.

"Manufacturing activity grew at a slower clip in July on the back of power outages and a moderation in new order inflows, with the weak global economic conditions dragging down export orders," said Leif Eskesen, economist at HSBC, sponsor of the survey.

But the impact of the unusually severe blackouts of the last two days of July, which hit grids in a dozen northern states home to around 670 million people, was not included in the survey.

That suggests manufacturing last month may have been hit harder than the headline PMI number suggests.

Manufacturing accounts for around 15 percent of India's gross domestic product, so a slowdown would not augur well for Asia's third-largest economy, already grappling with its weakest growth in almost a decade.

The new export orders sub-index fell to 49.7 from 52.3 in June, highlighting the global effect of the current downturn caused by the euro zone's 2-1/2 year old sovereign debt crisis.

Prices continued to rise, although a little more slowly than in June, showing that the Reserve Bank of India (RBI) still faces a tough task balancing lukewarm growth with relentless inflation.

"Input and output prices decelerated, but inflation remains above historical averages," Eskesen added.

The RBI left its policy rate unchanged at 8 percent on Tuesday for a second consecutive meeting as it tried to rein in inflation, after cutting it by 50 basis points in April to maintain growth.

Underlining the policy dilemma as it faces pressure to reduce rates, the central bank cut its economic growth forecast for the fiscal year to March 2013, and raised its inflation forecast.

The Indian economy has been throttled in recent years by a combination of high inflation, tight monetary policy, weak global economic conditions and the lax implementation of fiscal policies and reforms.

This prompted the RBI to press the government to implement long-pending reforms, such as allowing foreign direct investment in the supermarket and airline sectors.

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