Nikkei India Manufacturing Purchasing Managers Index jumps to 54.7 in December 2017

The Indian manufacturing sector ended the year on a strong note, with operating conditions improving at the strongest rate in five years. The overall upturn was supported by the sharpest increase in output and new orders since December 2012 and October 2016 respectively. In response to greater inflows of new business, job creation quickened to the greatest since August 2012. On the price front, input cost inflation accelerated to the strongest since April and was marked overall. Subsequently, firms raised their average selling prices at the fastest pace since February.

At 54.7 in December, the Nikkei India Manufacturing Purchasing Managers Index (PMI) rose from 52.6 in November. This was consistent with the strongest improvement in the health of the sector since December 2012. Notably, the PMI reading was slightly stronger than the average (54.0) recorded since the inception of the survey in March 2005. At the broad market group level, growth was recorded across all three monitored categories (consumer, intermediate and investment).

The upward movement in the headline index was driven by a sharp increase in output. Furthermore, the rate of expansion quickened to the strongest since December 2012. Higher order book volumes and improved underlying demand conditions reportedly contributed to greater production. Notably, the rate of growth outstripped the trend seen since the start of the survey.

New orders placed at Indian manufacturers rose for the second month in succession during December. Furthermore, the rate of growth quickened to the sharpest since October 2016. According to anecdotal evidence, new business inflows were underpinned by greater demand from home and international markets. In turn, new export orders rose at the quickest pace since June.

Resulting from improved demand conditions, Indian manufacturers upped their staffing levels at the end of the year. In fact, job creation accelerated to the strongest since August 2012.

In response to greater inflows of new orders, good producers were encouraged in December to engage in input buying at the sharpest rate since August 2015. As a consequence, the sector observed a modest increase in pre-production inventories for the first-time since June.

Meanwhile, the introduction of the Goods and Services Tax (GST) continued to exert upward pressure on manufacturers cost burdens in December. Furthermore, input cost inflation accelerated to the strongest since April and was sharp overall. Reflecting greater cost pressures, firms raised their output charges for the fifth month in succession. Although the rate of inflation quickened to a 10-month high, it was modest and weaker than the long-run series average.

Finally, the Future Output Index signalled the strongest level of confidence in three months, with more than one-in-five survey participants forecasting higher production. An expectation of an improvement in economic conditions was cited as the key factor behind positive sentiment. That said, the level of business confidence remained below the trend observed for the survey history.

Commenting on the Indian Manufacturing PMI survey data, Aashna Dodhia, Economist at HIS Markit and author of the report, said, "India's goods-producing economy advanced on its recovery path, with operating conditions improving at the strongest pace since December 2012. Strong business performance was underpinned by the fastest expansions in output and new orders since December 2012 and October 2016 respectively. Anecdotal evidence pointed to stronger market demand from home and international markets.

However, the sector continues to face some turbulence as delayed customer payments contributed to greater volumes of outstanding work. On the price front, July's Goods and Services Tax (GST) continued to lead to greater raw material costs, with input cost inflation accelerating to the sharpest since April. As consumer spending recuperates, firms were restricted in their ability to pass on higher cost burdens to clients which further placed upward pressure on firms' margins.

Challenges remain as the economy adjusts to recent shocks, but the overall upturn was robust compared to the trend observed for the survey history. This outlook was shared by the manufacturing community as sentiment picked-up to the strongest in three months amid expected improvements in market conditions over the next 12 months."

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