Growth in factory activity in India accelerated in February as the threat of a third wave of Covid-19 eased, while some easing in price pressures led to a strengthening of business demand and expectations, according to a private survey.
However, the investigation was conducted before Russia invaded Ukraine, which led to an immediate spike in oil prices. India is the world’s third largest oil importer, so the crisis will add to inflationary pressure and hurt consumer confidence.
The manufacturing purchasing managers’ index, compiled by IHS Markit from February 10 to 22, improved to 54.9 in February from 54.0 in January.
The February reading beat expectations of 54.3 in a Reuters poll and was above the 50 mark that separates growth from contraction for an eighth month.
“So far, India’s manufacturing sector has weathered the storm of the Omicron variant, no doubt buoyed by the relatively high inoculation rate,” noted IHS Markit economist Shreeya Patel.
Production and new orders rose for an eighth straight month in February, led by the consumer goods sector on favorable demand and rising sales. Growth in international demand for Indian manufactured goods edged up to a three-month high.
Business expectations for the next 12 months have improved and the index hit a four-month high on hopes of a return to normalcy and plans to expand.
However, companies continued to cut jobs for a third month, although the pace of the decline was marginal and the slowest in the streak.
The input price index was at a six-month low in February but showed raw material costs rose for a 19th month, led by higher prices for metals, cotton, chemicals and rubber. Factories have passed on some of these higher expenses to customers.
“There were, however, some key concerns that continued to threaten growth. More importantly, cost pressures remained elevated due to shortages while delivery times once again lengthened,” Patel added.
India’s economy grew 5.4% last quarter, slower than the previous two quarters and below the 6.0% growth expected in a Reuters poll.
A spike in oil prices due to the Russia-Ukraine crisis is likely to have a big impact on inflation and the rupee, as well as widen India’s current account deficit, further slowing growth.
The Reserve Bank of India was expected to raise rates in the next quarter to fight inflation, but if the crisis worsens, it could change that forecast.