Output slides in July as GST comes in force; fastest drop since global financial crisis

Key Highlights: 

• Manufacturing production dropped at fastest pace since 2009

• Output and new orders declined for the first time since demonetisation

• GST launch may have hampered demand

Nikkei's India Manufacturing Purchase Managers' Index (PMI) dropped in July as Goods and Services Tax (GST) weighed heavily on new orders and output. 

At 47.9 in July, down from 50.9 in June, the Nikkei India Manufacturing Purchasing Managers’ Index® (PMI® ) was at its lowest mark since February 2009 and highlighted the first deterioration in business conditions in 2017 so far, IHS Markit said in a statement on Tuesday. 

source: tradingeconomics.com

Pollyanna De Lima, Principal Economist at IHS Markit and author of the report, said, “Manufacturing growth in India came to a halt in July, with the PMI down to its lowest mark in almost eight-and-a-half years amid widespread reports that the sector has been adversely affected by the implementation of the goods and services tax."

“The downturn was broad-based across all subsectors covered by the survey, with output scaled back among firms in the consumer, intermediate and investment goods categories amid falling order books," she said. 

Anecdotal evidence indicated that the GST launch hampered demand. Different to the trend for total order books, new export orders continued to rise in July. That said, the rate of expansion softened from June’s eight-month high, the statement read. 

According to Indian manufacturers, higher tax rates sparked greater cost burdens in July. However, the pace at which input costs rose was moderate and much weaker than its long-run average. Reflecting attempts to win new business in the face of a competitive environment, some companies lowered their selling prices. Overall, the rate of discounting was marginal. Prior to July, charges had increased for 16 months in succession.

“Upcoming PMI releases will show whether underlying conditions remain on the downside or if July’s contraction was a temporary blip. Goods producers foresee the latter, with panellists widely commenting that a lack of clarity regarding tax rates caused confusion among suppliers and manufacturers themselves when agreeing on prices. As such, businesses expect GST information to become clearer in coming months,” De Lima said.

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