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India's manufacturing picks up as factory orders rise

The pace of growth in India's factory sector inched up in April, supported by bulging order books, but slower output growth and increasing price pressures dampened sentiment, a business survey showed on Wednesday.

The HSBC India Manufacturing Purchasing Managers' Index (PMI), compiled by Markit, rose to 54.9 in April from 54.7 in March.

The index has remained above the 50-mark that divides growth from contraction for more than three years.

"Activity in the manufacturing sector expanded at a slightly faster pace in April. While output growth moderated ... new orders continued to pour in, including for exports," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

The new orders sub-index rose to 61.1 in April after falling to 58.1 in March, buoyed by strong exports, but while remaining solidly above 50 the factory output index fell for the third straight month.

However, actual industrial output data is painting a bleaker picture with India posting sluggish factory production growth of 4.1 per cent in February from a year ago, way below the 6.6 per cent expected by analysts.

That does not bode well for Asia's third largest economy as factory output accounts for roughly 15 per cent of gross domestic product (GDP).

Last month economists cut their GDP forecasts for the fifth straight quarterly Reuters poll and now expect growth to average 7.1 per cent in the fiscal year to March 2013.

The government is more optimistic, expecting the economy to grow 7.6 per cent in the same period, but even that is still a far cry from the near double-digit rates seen before the onset of the global financial crisis in 2008.

The economy has been throttled in recent years by a combination of high inflation, tight monetary policy, weak global economic conditions and the lax implementation of fiscal policies and reforms.

The PMI survey showed the costs of raw materials grew at their fastest pace since August, and firms hiked their prices at the quickest rate in a year.

Fears of adding to inflationary pressures that have plagued the economy might prevent the central bank from cutting interest rates aggressively to stimulate growth.

The Reserve Bank of India cut the repo rate by a greater than expected 0.50 per cent or 50 basis points last month to boost the flagging economy, but warned that it had little room to manoeuvre as inflation was likely to remain elevated.

"Inflation accelerated with both output and input prices rising faster," said Eskesen. "This suggests that upside risks to inflation remain and that the RBI's rate cut could turn out to have been premature and too aggressive."