Manufacturing sector shrinks

The downturn in the economy is gathering momentum. Till Octo ber, India was the only major economy in the world that saw expansion in manufacturing, according to surveys of purchasing managers.

The seasonally adjusted November ABN Amro PMI, or purchasing managers index, for India has slipped to 45.8, which means that manufacturing contracted during the month, compared with the previous month. Any reading below 50 indicates contraction.

What is even more worrying is the pace of the downturn. The output index, for instance, was at a very healthy 61.7 in September, slipped to 54.1 in October and slid to 44.6 in November. The decline in output was the first since data for the index started to be collected in April 2005.

The new orders sub-index was even more affected, falling to 43.2 in November from 54.4 in October. As many as 29.4% of the respondents said that new orders during the month were less than that in the previous month.

Clearly, investment demand has been affected.

In October, most firms had said new orders remained strong in the domestic market and international orders had dwindled. That has changed, with the November survey pointing out, “Anecdotal evidence indicated that the deterioration in domestic demand was especially severe in November.” The new export orders sub-index also worsened, falling from 49.7 in October to 46.7 in November. HSBC’s Robert Prior-Wandesforde wrote in a research note, “Historically, the manufacturing PMI hasn’t tracked industrial production particularly well but has had a much closer relationship with export growth. As such, it is perhaps not so surprising to see export values down 12.1% year-on-year in October. This is the first contraction since August 2003 and the largest since October 1998.” Even the depreciation of the rupee against the US dol lar is not helping exports.

The only sub-index that does not show contraction yet is employment. That was still at 50 in November, indicating that employment neither expanded nor contracted during the month.

But with increasing anecdotal evidence of job losses, it’s likely that the employment index, too, will go the way of all the other PMI sub-indices in the coming months.

CLSA’s manufacturing PMI for China, at 40.9 in November, already showed a contraction in employment in October. Once employment starts to fall in India, it will hurt consumption demand even more. Already in November, Maruti’s car sales were down 27%.

Like the rest of the world, manufacturing has started contracting both in India and China. Unfortunately, while China has already announced a huge fiscal stimulus to help prop up the economy, there has so far been no sign of one in India.