India’s manufacturing production has dipped at the fastest rate seen since the global financial crisis of 2008, according to the Purchasing Managers’ Index released by IHS Markit. The drop was caused by confusion about tax rates around the time the Goods and Service Tax was introduced, experts believe.
The PMI dropped to 47.9 in July, compared with 50.9 in June, the Markit survey said on Monday. A figure above 50 implies that the sector is expanding, a score below that means the sector is shrinking as the volumes of orders reduce.
“Manufacturing growth in India came to a halt in July,” said Pollyanna De Lima, Principal Economist at IHS Markit, “The PMI [is] down to its lowest mark in almost eight-and-a-half years amid widespread reports that the sector has been adversely affected by the implementation of the goods and services tax.”
Markit believes that the GST rollout led to both output and orders shrinking for the first time since demonetisation. The PMI had fallen to 49.6 in December, a month after Rs 500 and Rs 1,000 notes were demonetised. Markit said that companies were discouraged by the lower demand during the introduction of the GST, which in turn affected factory output and ended six consecutive months of PMI growth .
The sharp fall in PMI implies that the manufacturing sector in the country still remains in the doldrums and needs more time than expected to improve.
Economists claim that there is more capacity than demand in the sector, causing growth to remain low. Meanwhile, the government on July 24 told the Lok Sabha that the growth of capital investments in the country dropped to 5% in 2016, compared with 11% in 2015.
Lima said that the downturn was across the entire manufacturing industry, and that time will tell if if the GST supports growth and if there actually is clarity in tax rates because of it.
“Upcoming PMI releases will show whether underlying conditions remain on the downside or if July’s contraction was a temporary blip,” Lima stated in the report. “Goods producers foresee the latter, with panellists widely commenting that a lack of clarity regarding tax rates caused confusion among suppliers and manufacturers themselves when agreeing on prices.”