India’s Manufacturing Activity Contracts, ‘Heavily’ Weighed Down By GST

India's manufacturing activity gauge contracted for the first time in seven months, hit by the implementation of the Goods and Services Tax.

The Nikkei India Manufacturing Purchasing Managers' Index (PMI)—compiled by Nikkei and research firm Markit—stood at 47.9 in July, compared to 50.9 in June. A reading below 50 indicates a contraction and a reading above it indicates expansion.

New orders and output decreased for the first time since the demonetisation downturn in December last year, taking the index to its lowest level in more than eight and a half years. The fall in manufacturing activity came amidst reports that the implementation of GST had impacted the regular flow of manufacturing activity.

There have been “widespread reports that the sector has been adversely affected by the implementation of the goods and services tax," wrote Pollyanna De Lima, principal economist at IHS Markit in a statement issued with the data release.

The drop in manufacturing PMI in July adds to a build up of weak economic data. Government data released on Monday showed that output across the eight core sectors of the economy rose a mere 0.4 percent in June, compared to 4.1 percent in May.

Weak growth indicators, together with lower than expected inflation, could set the stage for a rate cut later this week.

India's monetary policy committee (MPC) will announce its interest rate decision on Wednesday after concluding a two-day meeting.

Also Read: Will A Rate Cut Matter?

The PMI data released on Tuesday showed that incoming new work declined at the steepest pace since 2009. While domestic demand was dampened, exports continued to grow in July.

Higher tax rates arising out of GST also led to a greater cost burden during the month. However, the pace at which costs rose was still moderate as compared to its long term average. Payroll numbers fell after increasing in the previous month while number of employees remain stagnant.

The report maintained a positive 12-month outlook for output on expectation of better clarity regarding GST in the months ahead, a healthy pipeline and improved product quality.