The introduction of GST (Goods and Services Tax) seems to have weighed heavily on the Indian manufacturing sector in July. Survey data released by PMI (Purchasing Managers Index) found a dip for new orders and output. Since February 2009, this is the second instance of a dip in output. The first was during the month of December owing to demonetization-related downturn.
The GST has resulted in companies purchasing fewer quantities of inputs for use in the production process, leading to an overall decline in holdings of raw materials and semi-finished items. Cost burdens too increased further, but factory gate charges were lowered as firms attempted to win new business.
The index has been down to 47.9 in July from 50.9 in June. The official release noted that this is the first deterioration in business conditions in 2017 so far. This downturn is widespread across three broad areas of manufacturing, with intermediate goods producers the worst affected.
Lower sales triggered an overall accumulation in stocks of finished goods. The rise in holdings of manufactured products was marginal, but interrupted a two-year period of ongoing depletion.
The downturn in factory orders discouraged companies to lower production levels for July. The fall ended a six-month sequence of growth, and the rate of reduction has been the most pronounced since the global financial crisis.
The survey also finds that higher tax rates sparked greater cost burdens in July for Indian manufacturers, although input costs rose at a moderate and much weaker pace than the long-run average. Companies took to lowering prices through discounts and offers. The overall rate of discounting remained marginal.
Speaking about the downturn, Polyanna De Lima, IHS' principal analyst was quoted in the report saying, "the downturn was broad-based across all sub-sectors covered by the survey, with output scaled back among firms in the consumer, intermediate and investment goods categories amid falling order books."
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