Factory growth shrinks for first time in over 4 years

Indian manufacturing growth nearly stalled in May as factory output shrank for the first time in over four years, a survey showed on Monday, suggesting the economy remained frail at the start of the new fiscal year.

The sombre PMI findings came hard on the heels of data released on Friday that confirmed Asia's third largest economy grew at its slowest pace in a decade in the fiscal year that ended in March.

The overall HSBC Manufacturing Purchasing Managers' Index (PMI), which gauges business activity in Indian factories but not its utilities, sank to 50.1 in May from 51.0 in April, and was the third straight monthly fall.

Though the May reading was the lowest since March 2009, the overall index has held above the watershed 50 level that divides growth from contraction for over four years.

The reading for the factory production sub-index, however, showed output contracted in May from a month earlier as new orders growth slowed to a trickle. The output sub-index fell to 48.6 in May from 50.2 in April.

"Economic activity in the manufacturing sector slowed further in May as output contracted in response to softer domestic orders," said Leif Eskesen, an economist with survey sponsor HSBC. Eskesen said power outages added to the drop in production.

Years of reckless spending, a long struggle containing inflation, high interest rates, policy paralysis and fragile global demand have put India back in a rut of slow growth.

The PMI survey has shown factory activity in April and May has slowed to the brink of contraction, which will likely hamper the feeble recovery seen in the January-March

quarter.

Government data released on Friday showed the Indian economy grew 4.8 per cent in the January-March quarter from a year ago, bettering the 4.7 per cent growth recorded in the previous quarter, and resulting in decade-low growth of 5.0 per cent for the fiscal year to March 2013.

The official data showed manufacturing sector grew an annual 2.6 per cent in the three months to March, almost the same pace as the previous quarter.

One bright spot in the PMI survey showed orders from abroad came in at a faster pace than in April which might help the sector avoid a downturn this month.

Firms also cut their prices, as input costs rose last month at their slowest pace in over four years.

That could help ease the Reserve Bank of India's concerns over inflationary pressures as it prepares for a policy meeting later this month, with the market speculating on whether it will make another interest rate cut.

"These numbers have heightened the probability that the RBI will fire another salvo at its June policy meeting," Eskesen said.

The central bank has lowered its policy rate by a total of 75 basis points since January, bringing it down to 7.25 per cent, to try to help spur economic recovery.

But the RBI has warned that upside risks to inflation and a high current account deficit give it limited room for more monetary easing even though economic growth remains weak.