Economy
India manufacturing PMI rose to 52.5 in February

The February manufacturing PMI in India rose to 52.5, its highest reading in the last 12 months, from 51.4 in January on stronger activity and new orders sub-indices

The manufacturing purchase manager’s index (PMI) rose to 52.5 in February 2014, its highest reading in the last 12 months, from 51.4 in January 2014 on stronger activity and new orders sub-indices.

 

According to Nomura, the output index rose to 54.0 in February 2014 from 52.6 in January 2014. The expansion was led by consumer goods sectors as has been the case over the past few months. Activity levels also improved this month in the intermediate sectors, which suggests that steady demand in the consumer sector is now also flowing to the upstream industries. However, activity in the capital goods sector remained uninspiring.

 

Nomura adds that the pickup in new export orders index for the past three months indicates that export growth is likely to improve following the slack over last few months. The rise in the ratio of new orders to finished goods inventory to 1.07 from 1.02 in January 2014 also suggests that activity levels are likely to sustain in coming months. The summary of PMI data available over the last three months is given in the table below:

 


Nomura believes that GDP growth will continue to consolidate for the new few quarters, given monetary and fiscal tightening and the uncertainty ahead due to the upcoming general elections, and it expects real GDP growth to remain in a 4.5-5.0% range until Q3 2014. Overall, Nomura expects GDP growth to rise only slightly to 5% year-on-year in FY15 (year ending March 2015) from an estimated 4.7% in FY14.

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Domestic demand in India still very weak, says Nomura

A sustained growth recovery led by the revival of the investment cycle is more likely after Q3 2014 and that too is contingent on a stable political outcome in the forthcoming general elections, warns Nomura in a research note

Current data on the Indian economy confirms that domestic demand is still very weak and overall growth remains supported by external demand, cautions Nomura in a research note. Nomura expects India’s GDP growth to continue to consolidate in the 4.5-5.0% range until Q3 2014. Net exports should be supported by better global growth and weak domestic demand. However, private domestic demand is unlikely to pick up in the next few quarters because of high inflation, monetary tightening and political uncertainty ahead of the elections. Further, fiscal austerity is likely to be an additional drag on growth in the next few quarters.

 

According to Nomura, a sustained growth recovery led by the revival of the investment cycle is more likely after Q3 2014 and that too is contingent on a stable political outcome in the forthcoming general elections. It expect GDP growth to average 4.7% year-on-year in FY14 (year ending March 2014), up from 4.5% in FY13 and then pick up further to 5.0% in FY15. Further, the advanced GDP growth estimate of 4.9% in FY14 is likely to be revised lower (closer to our estimate of 4.7%) as growth has averaged only at 4.6% in the first three quarters of the fiscal year and is unlikely to see a substantial improvement in the final quarter.

 

The basic GDP growth performance is summarised in the table below:
 

 

Nomura analysts have the following points to make on the overall GDP analysis in the Indian economy:

 

(a) Real GDP growth eased to 4.7% y-o-y in Q4 2013 from 4.8% in Q3, slightly lower than market expectations;

(b) Agriculture growth eased to 3.6% y-o-y from 4.6% in Q3, while GDP growth ex-agriculture improved marginally to 4.9% from 4.8% as the pickup in service sector growth more than offset the contraction in the industrial sector;

(c) From the demand side, growth was supported by strong growth in exports and to some extent government spending. In comparison, private domestic demand remained very weak, with both private consumption and fixed investment growth still around their lows.

(d) Nomura expects GDP growth to remain in the 4.5-5.0% range in the coming quarters as domestic demand is likely to remain weak, while export demand is expected to remain strong. Overall, we expect GDP growth to average 4.7% in FY14 and 5.0% in FY15.

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