India’s factory activity growth slows as virus affects business

India’s manufacturing activity expanded at its slowest pace in four months in March and is likely to get worse as demand and output take a hit from the coronavirus outbreak, putting a severe dent in business optimism, a private survey found.

A 21-day nationwide lockdown, which started on March 25 in the world’s second-most populous country, is expected to deliver a heavy shock to the economy despite enormous fiscal and monetary support packages by the government and the Reserve Bank of India (RBI) last week.

The Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, declined to 51.8 last month from February’s 54.5, its lowest since November, but still above the 50-mark that separates growth from contraction for a 32nd month.

“The Indian manufacturing sector remained relatively sheltered from the negative impact of the global coronavirus outbreak in March, however, there were pockets of disruption and a clear onset of fear amongst firms,” noted Eliot Kerr, economist at IHS Markit.

“The most prominent signs of trouble came from the new export orders and future activity indices, which respectively indicated tumbling global demand and softening domestic confidence.”

A sub-index that tracks overall demand in the sector hit a four-month low as foreign demand contracted for the first time in nearly two and a half years, falling at its fastest rate since September 2013.

That was despite input and output prices having increased at their weakest in five and six months, respectively, a sign of a decline in overall inflation, which has continued to remain above the RBI’s medium-term target for five months.

Lower price pressures could provide additional room for the central bank to ease policy further. It cut its key interest rates by 75 basis points and introduced a stream of unconventional measures last week.

Optimism about the output for the coming 12 months fell to a low not seen since October 2015, echoing the findings of a Reuters poll which forecast Asia’s third-largest economy to grow at its weakest pace in the fiscal year 2020/21 since the global financial crisis.

“Should the trajectory of injections continue in the same vein, the Indian manufacturing sector can expect a much sharper negative impact in the coming months, similar to the scale seen in other countries,” added Kerr.

A week earlier, India’s central bank had slashed interest rates after the government announced a $23bn stimulus package to help millions of its poor weather the effects of the coronavirus pandemic.