The two indices moved in opposite directions, with services coming off a 11-year high in June and manufacturing speeding up from the previous month’s nine-month trough. New manufacturing orders recovered in July with exports chipping in to improve order books and cost of raw materials rose at their slowest rate in almost a year. In services, weakening sales growth, including international sales, and inflationary pressures affected recovery.
Despite decelerating, input prices remained elevated and firms could pass some of the additional costs to customers. Corporate results for the first quarter suggest pressure on earnings after four consecutive quarters of expansion. A broad majority of firms in both manufacturing and services expect payroll numbers to be static with a poor outlook on hiring amid uncertainty in the business outlook. The recovery in services is expected to be uneven as more contact-intensive sectors regain their pre-lockdown tempo. As for manufacturing, it continues to face weak rural demand that should improve with the monsoon.
The broad trends for July emerging from the survey of purchasing managers are corroborated by high frequency indicators such as power demand, fuel sales, rail freight and e-way bills. Goods and services tax (GST) collection also spurted during the month. Capacity utilisation in manufacturing is above its long-term average and bank credit growth is robust.
Policy normalisation after the pandemic has been extra cautious about nursing a fragile recovery. Policymakers are holding on to GDP growth projections for this year. Downside risks to these are principally external, and that is clouding the outlook despite consistently expanding business activity.