- POSTED: 01 Aug 2014 19:23
- UPDATED: 01 Aug 2014 23:05
Indian factory output surged to a 17-month peak in July, according to a key business survey on Friday (August 1), fuelling recovery hopes in Asia's third-largest economy.
NEW DELHI: Indian factory output surged to a 17-month peak in July, according to a key business survey on Friday (August 1), spurring hopes that Asia's third-largest economy may be pulling out of its longest downturn in a quarter-century. Car sales accelerated briskly as well, after falling for two straight years, suggesting an economic pickup.
But the HSBC Purchasing Managers' Index (PMI) measuring factory production - keenly watched as a harbinger of industrial expansion and overall economic health - also flagged inflation worries ahead of a key monetary policy meeting next week. The PMI jumped a full 1.5 points to 53.0 last month - its best level since February 2013. A reading of over 50 points suggests expansion while under 50 indicates contraction.
"A flood of new orders from both domestic and external sources has led to a surge," Frederic Neumann, HSBC Asian research co-head, said. "Finally, the manufacturing sector is starting to pick up steam," Neumann said. The output rise was across the board, Neumann noted, boosting hopes India's economy could be rallying from its longest spell of sub-five-percent growth in a quarter-century.
Business confidence has been building that Prime Minister Narendra Modi's right-wing government, which took power in May, will initiate policy changes to propel growth and emulate China's economic ascent, despite a budget last month that eschewed radical reforms.
The PMI results coincided with a government survey in neighbouring China showing manufacturing activity climbed last month at its fastest pace in over two years. However, India's PMI survey also highlighted mounting inflation worries ahead of a central bank monetary policy-setting meeting next Tuesday.
Input prices accelerated at their fastest since February, the survey found, suggesting stubbornly high inflation could rise further as firms seek to recover increasing costs. "The speed of the recovery has also lifted price pressures" which means the central bank "may not cheer as loudly as the rest of us" about the PMI readings, said Neumann.
Industry has been clamouring for the hawkish bank to cut India's leading interest rate from a steep eight percent to stimulate growth that was 4.7 percent in the last financial year to March 2014, down from nearly nine percent as recently as in 2011.
But most economists expect no cut in rates until at least the first quarter of the next financial year with consumer price inflation riding at 7.31 percent, far above the bank's six-percent target. Some suggest another rate hike may come, although not immediately, as below-normal monsoon rains threaten to push up food prices while Middle East tensions could raise crude oil costs in an economy heavily dependent on imported fuel.
Still, the PMI survey's overall tone was upbeat, showing new orders - an important sub-category and portent of future output - growing at the fastest pace in 17 months.
Separate data on Friday showing vehicle sales shifting into the fast lane also indicated greater economic buoyancy. Leading carmaker Maruti Suzuki's unit sales jumped 22 percent in July from the same year-ago month while Honda's sales leapt 40 percent.
Maruti's chief financial officer Ajay Sheth said the sales rise was driven by a post-election mood turnaround. "Consumer sentiment changed and turned positive," Sheth said.