India's Factory Activity Remained Strong In May Despite Rising Inflation

Amid rising inflation and commodity prices, the Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, came in at 54.6 in May, slightly lower than April’s 54.7

Companies recruited employees at the quickest rate in nearly two and a half years, which is a positive sign for the labour market, according to a survey report.

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New Delhi: Factory activity in India expanded at a better-than-expected speed in May, news agency Reuters has reported. According to a private survey report, despite persistently high inflation, overall demand remained resilient, encouraging companies to hire at the fastest rate since January 2020.

The report comes a day after the government announced India’s gross domestic product (GDP) expanded at an annual rate of 4.1 per cent during the fourth quarter (Q4), which is the weakest growth in a year.

Amid rising inflation and commodity prices, the Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, came in at 54.6 in May, slightly lower than April’s 54.7.

The figure recorded in May is still above the 50-level separating growth from contraction for an eleventh month and even better than the Reuters poll median forecast of 54.2.

Overall demand has risen with new orders coming up despite at a slower pace, while foreign demand grew at its strongest pace since April 2011 amid the Russia-Ukraine conflict, economic slowdown in China, and high inflation.

Pollyanna De Lima, economics associate director at S&P Global, said, “India's manufacturing sector sustained strong growth momentum in May. In response to demand resilience, companies continued with their efforts to rebuild stocks and hired extra workers accordingly.”

The report said that companies recruited employees at the quickest rate in nearly two and a half years, which is a positive sign for the labour market.

However, rate of unemployment rose to 7.83 per cent in April from 7.60 per cent in March, according to the Centre for Monitoring Indian Economy, a Mumbai-based private think tank. Overall, soaring commodity rates remained a major concern.

In May, input price inflation eased a bit, but output prices jumped at their fastest pace since October 2013, suggesting overall inflation may remain elevated over the coming few months.

“While firms appear to be focusing on the now, the survey's gauge of business optimism shows a sense of unease among manufacturers," said De Lima, while adding, “The overall level of sentiment was the second-lowest seen for two years, with panellists generally expecting growth prospects to be harmed by acute price pressures.”

The Reserve Bank of India (RBI) in early May raised repo rate by 40 basis points to 4.40 per cent that surprised the market. It is expected that the central bank may go for another rate hike aggressively over the next few months to combat rising inflation in the country.