Job growth strong, price rise muted; but the worry is that firms are reporting cash flow problems.
Manas Chakravarty
The Nikkei India Composite Purchasing Managers Index, out today, provides a snapshot of conditions in the Indian economy just before the monetary policy announcement on February 7. The Composite PMI came in at 53.6 for January, unchanged from the December level. The news release says it is 'indicative of a solid expansion in private sector activity.' A PMI reading above 50 indicates expansion from the previous month, while one below 50 denotes contraction.
While growth momentum in services slipped a bit in January, it moved up in the manufacturing sector. But the composite PMI, which includes both the services and manufacturing sectors, shows that growth is still strong. That means the monetary policy committee need not worry about slowing growth when it decides on the policy rate.
The monetary policy committee will also welcome the fact that the output prices sub-indices for both manufacturing and services show muted increases. That indicates the pressures from higher core inflation may be contained.
Employment growth too has been strong. Pollyanna De Lima, principal economist at IHSMarkit said, "The good news came from the Indian labour market. Job creation at service providers was among the strongest seen for the past seven-and-a-half years at the start of 2019. The increasing willingness of companies to hire workers should help reduce still high levels of unemployment in the country."
There is, though, one source of worry. Some firms surveyed in both the services and manufacturing sectors reported cash flow difficulties. This is what the survey says about the manufacturing sector: 'For the third straight month, outstanding business increased in January. Monitored companies indicated that cashflow difficulties, arising from delayed payments from clients, prevented them from completing unfinished work. That said, the overall pace of backlog accumulation was slight and matched that seen at the end of 2018.'
And this is what the services PMI said, ‘January data pointed to an increasing degree of pressure on the capacity of Indian service providers, as unfinished business expanded to a greater extent than at the end of 2018. Moreover, the current run of rising backlogs was stretched to 32 months. Monitored companies indicated that delayed client payments impacted on their ability to complete outstanding workloads.’ The accompanying chart has the details.
It is possible that the delayed payments could be linked to the problems that have arisen in the non-banking finance sector and in debt mutual funds in recent months that has taken a toll on many well-known business groups. The RBI needs to keep a close watch to ensure that lines of credit stay open and there is adequate liquidity in the markets.
