The panel members attributed this fall in new orders after 51 months to fragile economic environment in the country. However, there was a sharp increase in export orders.
"Export business rose at the sharpest rate since January as demand from key foreign clients strengthened. Orders from abroad expanded at consumer and intermediate goods producers, but in the investment goods sector a decline was registered," said Markit Economics, the financial information firm that compiles the PMI.
At 50.1 in May, the PMI was a 50-month low. A reading above 50 points indicates growth, while that below 50 signifies a contraction in the sector.
The output, which fell after a gap of 50 months in May, continued to decline in June as well.
"Reduced output levels were recorded for the second month running in June, amid evidence of tougher economic conditions and persistent power cuts," the firm said in its monthly report.
However, the overall pace of contraction eased since May. The fastest decline among all the three monitored sub-sectors was recorded at consumer goods producers. According to the firm, there was a rise in input prices - the sharpest since February - mainly due to unfavourable exchange rates.
Leif Eskesen, HSBC chief economist for India & Asean, said: "Despite the moderate pace of growth, output prices picked up slightly and input prices rose more notably, partly in response to the depreciation of rupee."
In May, the rupee fell to an all-time low of Rs 60.77 in intra-day trades due to capital outflows and heavy dollar demand. However, analysts said the rupee depreciation would help export numbers and that would ultimately have some positive impact on manufacturing.
"The new orders fall and the PMI still remaining flat show that there was an upside in exports due to falling rupee. This trend is positive and exports will translate into better manufacturing in medium and long term basis," said Anis Chakravarty, senior director at Deloitte India. Experts also believe this could mean green shoots of recovery would soon be witnessed in the economy as index of industrial production (IIP) released in June had shown a significant growth in manufacturing.
Markit Economics also pointed out that the backlogs of work accumulated again in June amidst power, raw material and water shortages. However, the fastest rise was witnessed in employment since March this year.
Also, the quantity of items purchased for production rose in June, rising consecutively for 51 months. The surveyed firms that reported higher buying activity attributed this to increased foreign demand and forecasts of better economic conditions in the coming months.
The Services PMI is expected to come on Thursday. In May, PMI for manufacturing and services showed constracting trends. The PMI Services rose to three-month high of 53.6 points in May from 50.7 points in the previous month. However, experts believe that services and manufacturing do not necessarily correspond always.