Country’s private sector activity growth suffered slowdown last month

The Nikkei India Composite PMI Output Index, which maps both manufacturing and services sectors, dropped from 54.3 in March (37-month high) to 52.8 in April, pointing to a softer expansion in private sector activity across the country.

"Having accelerated to the fastest in over three years during March, activity growth across India's private sector took a step back in April," said Pollyanna De Lima, economist at Markit, which compiles the survey. Lima added that manufacturers appear to be still struggling to generate strong upward momentum in a subdued demand environment while solid increase in activity and new work were sustained among service providers.

Meanwhile, the Nikkei Services Business Activity index was down from 54.3 in March to 53.7 in April. The survey noted that April data highlighted a general lack of pressure on the capacity of Indian service providers as unfinished business declined. 

On the employment front, services employment was unchanged in April. Broadly stagnant employment trends have now been registered through the past nine months. Meanwhile, manufacturing payroll numbers were also unchanged.

The higher prices paid for fuel, average input costs faced by Indian services companies increased in April and the rate of cost inflation reached a 13-month high. Part of additional cost burdens was passed on to clients, as both manufacturers and service providers raised their selling prices again in April, Nikkei said.

Meanwhile, services firms' sentiment weakened slightly in April, with the degree of optimism being modest by historical standards.  "Nevertheless, a softer expansion in activity, combined with unchanged employment and a dip in business expectations among the latter suggest that companies are not fully convinced about the recovery and that March's stronger numbers might have been a one-off," Lima added.

In the first bi-monthly monetary policy review for 2016-17 announced on April 5, RBI governor Raghuram Rajan reduced the key interest rate by 0.25 per cent and introduced a host of measures to smoothen liquidity supply. While this was the first rate cut after a gap of six months, RBI has lowered its rate by 1.5 per cent cumulatively since January last year. However, the industry still wants further rate cuts from the central bank.

Meanwhile, with drought in different parts of the country putting pressure on rural sales, FMCG firms including Marico, Dabur and Godrej Consumer Products Ltd (GCPL) are pinning hopes on 'pent up' demand to push growth after predictions of a normal monsoon this year. They expect a pick-up in sales during the second half of the current fiscal.

"Rural sales have definitely come under stress due to the two successive droughts. We have extreme water scarcity in some states. These two successive droughts have lead to purchasing power of people to crash in the rural areas," GCPL Business Head India and SAARC Sunil Kataria said.

Expressing similar sentiments, Marico Ltd MD and CEO Saugata Gupta said: "There is short-term pressure on rural consumption and the situation is slightly stressed, especially in the states that have been affected by drought for two consecutive years." 

Dabur India Chief Financial Officer Lalit Malik said: "Poor monsoons last year did have an adverse impact on rural demand and we have seen growth slowdown in the hinterland towards the second half of the year." Kataria said due to the combined effect of drought and lower price for crops, overall rural demand which was growing significantly between 2011 to 2014 has definitely come down.

Many parts of states like Maharashtra, Karnataka, Kerala, Gujarat, Uttar Pradesh, Orissa and West Bengal are facing drought. With companies garnering up to 30 per cent of their overall sales from rural markets, they are keeping their fingers crossed for a good monsoon this year. 

The companies are keeping fingers crossed for a good monsoon this year so that sales could be revived in the second half of this fiscal. "The monsoon is going to be very critical for the rural demand to pick up, and with prospects of a good monsoon, we remain assured that the second 

half of the year will go well," said Gupta.

Kataria said: "I expect a significant swing in the second half due to monsoon in June to September and it would change consumer sentiment." He said the steps announced by the government in the Budget to boost rural economy will have an impact on sales. "There has been pent up demand. People have been postponing purchases as as they do not have money today but aspirations do not die in consumers' mind. They just hold back."

 

Malik said the government initiatives coupled with the forecast of a normal monsoon this year, should accelerate demand growth in the hinterland. The Met office predicted last month that after two consecutive drought years, the country will receive "above normal" monsoon with a fair distribution of rainfall across major parts of country and it will be a "good year", easing fears of struggling farmers.