Lower demand drags Indian factory growth to two-year low

India’s factory activity growth hit a two-year low in October as new orders and output rose at a slower pace, dragging business confidence to its weakest since early 2017, a survey showed on Friday, suggesting more policy easing is on the cards.

That mirrors a recent sharp deceleration in global manufacturing activity as a protracted US-China trade war took a toll on business sentiment, investment and overall growth.

The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, dropped to 50.6 last month from September’s 51.4, confounding expectations in a Reuters poll for a rise to 51.8.

Just the same, it has held above the 50-point threshold mark that separates growth from contraction for the 27th straight month, an uninterrupted run not seen for around five years.

“PMI data for October showed a continuation of manufacturing sector weakness in India, with sales growth softening to the slowest in two years,” noted Pollyanna De Lima, principal economist at IHS Markit.

“Weakening demand had a domino effect in the manufacturing industry, knocking down rates of increase in production, employment and business sentiment.”

The new orders sub-index, a proxy for domestic demand, slumped to 51.3 from September’s 52.3, its lowest since October 2017. That pushed firms to slow the pace of hiring to a six month low, which is likely to raise concerns for Narendra Modi’s government given it is under pressure to create more jobs.

Moreover, in a further sign the ailing economy will take a while to recover, optimism slipped in October to its weakest since soon after a 2016 high-value currency ban that affected day-to-day operations of small- and medium-sized businesses.

The downturn in overall business activity and demand suggests the Reserve Bank of India might need to ease policy again, on top of the cumulative 135 basis points of rate cuts delivered this year.

Certainly, the inflation gauge in the PMI survey indicated the RBI has the headroom for further policy action, as input prices declined for the first time in over four years. While firms raised output costs at a faster rate compared to September it is unlikely to push overall inflation above the central bank’s medium-term target of 4%.

A World Trade Organization (WTO) panel ruled on Thursday that Indian export subsidies are prohibited and should be removed, upholding a complaint brought by the United States.

The panel largely agreed with US claims challenging export subsidies granted in the form of exemptions from customs duties and a national tax, while rejecting some U.S. arguments. It called on India to withdraw the export-contingent subsidies within periods varying from 90 to 180 days.

The US Trade Representative’s Office, in a statement, said that the panel had agreed that India provides prohibited subsidies to Indian exporters worth more than $7 billion (£5.4 billion) annually, including to producers of steel products, pharmaceuticals, chemicals, IT products and textiles.

Meanwhile, India’s unemployment rate in October rose to 8.5%, the highest since August 2016, and up from 7.2% in September, according to data released by the Centre for Monitoring Indian Economy (CMIE) on Friday, reflecting the impact of a slowdown in the economy.

India’s infrastructure output fell 5.2% in September from a year earlier, the worst performance in years, government data showed on Thursday, while the industrial output shrank at its fastest rate in more than six years in August.

India’s fiscal deficit in the six months through September approached 93% of the target for the full year, limiting the scope for Prime Minister Narendra Modi to consider more tax cuts to boost economic growth.

Amid growth worries highlighted by the manufacturing PMI index falling to a 2-year low and dismal auto sales data released on Friday, the Sensex and Nifty finished with marginal gains, albeit the sixth day of gains in a row.

The key driver, analysts said was the FII participation. The inflow of foreign funds in the Indian equity market has been over Rs9,063.29 crore during the month of October.

“Market traded flat due to weak monthly two-wheeler sales and manufacturing growth for the month of October,” said Vinod Nair, Head of Research, Geojit Financial Services.

The Sensex closed 35.98 points higher at 40,165.03 after flip-flopping between the high of 40,283.30 and the low of 40,014.23.

The broader Nifty closed 13.15 points up at 11,890.60.

Agencies