India’s Manufacturing Touches Highest Level In 16 Years

On today’s episode, financial journalist Govindraj Ethiraj talks to Teresa John, Deputy Head Of Research and Lead Economist with Nirmal Bang Financial Services as well as Madan Sabnavis, Chief Economist at Bank Of Baroda Research.


Our Top Reports For Today

  • (00:00) Stories Of The Day
  • (02:26) Investors Have Begun Switching Out Of India Into China
  • (06:36) Heat Waves Could Hurt The Economy In More Ways Than One, Including Inflation
  • (10:27) India’s Manufacturing Touches Highest Level In 16 Years
  • (11:39) Investment Intentions Are High, How Much Is Getting Converted And How Airlines Are Leading Most Of It
  • (22:28) Why Indian Airlines Struggle When Faced With Crisis


NOTE: This transcript contains only the host’s monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

Investors Resume Search For A Rally Which May Not Materialise

Investors are grappling with a mild conundrum, where is the pre-election rally ? Data suggests that you could have one if expectations of the return of the party in power were low, let’s say six months before elections and then increased closer to elections.

Reuters points out that historically Indian equities have started strong in election years, with the Nifty index averaging a 5.2% return in the first quarter of the previous three election cycles. 

However, the index saw only a 2.7% increase in the same period this year.

Elections are due to start in a few weeks on April 19 and obviously expectations are the same as they were maybe six months ago.

And thus the markets have little to celebrate since the celebrations, for all practical purposes over, began much earlier.

In market terms, a victory is already priced in.

On Tuesday, the Sensex drifted into the green in the early hours of trade but then drifted out again, ending at 73,904, down 111 points.

The Nifty50, on the other hand, ended at 22,453, down 9 points.

So not much has changed there.

The MidCap and SmallCap indices did better on the BSE, up 1% each.

As we discussed yesterday, the midcap and small caps have shrugged off regulatory scrutiny, overhang or the many warnings of froth and exuberance from the Securities & Exchange Board of India.

The Nifty index has climbed over 30% over the past year, the second biggest gain among Asian indexes.

Investors Eye China Again

We’ve been discussing the China stocks rebound for some time now but it appears that the rebound could now start pulling away some funds from India, albeit small amounts.

Bloomberg is reporting that funds like Lazard Asset Management, Manulife Investment Management and Candriam Belgium NV are paring exposure to India after a record-breaking rally and switching to China, as Beijing’s support for its economy spurs a recovery in industrial profit and manufacturing.

The swing is also suggestive of how China has managed to sway opinion in its favour, on its own economic focus and of course the potential to offer returns to investors, in this case overseas ones.

This is not to say that major Wall Street banks have changed their view on India as a key investment destination for the next decade, as we have heard and documented right here in recent months. 

But it’s about value or perceived value.

“As China has gotten cheaper and cheaper, some of our Chinese investments have become less valuable but the investment case for them has increased,” James Donald, head of emerging markets at Lazard Asset, told Bloomberg. 

More than 90% of emerging market funds are adding back their positions in mainland Chinese shares, which were underweight, while also dialling back exposure to India, according to HSBC Holdings Plc. Candriam’s $2.5 billion emerging markets fund has raised its exposure to China “partly at the expense of India,” said portfolio manager Vivek Dhawan.

“We have positioned India as a funding source for some interesting themes that we find in China, especially those related to self-sufficiency and localization,” he said. “We are adding names in the semiconductor supply chain because China would increase spending there.”

This is of course interesting since India too is seeing semiconductor projects coming up but funded by companies along with Government aid or subsidies.

The MSCI China Index incidentally trades at 9.1 times its one-year forward earnings, 60% cheaper than the multiple for the MSCI India Index, which hit a record last month.

The conclusion for now is that fund managers continue to see the decadal growth story of India as positive and are betting on political continuity but are also equally concerned about valuations right now, something that has been repeatedly expressed by many investors and fund managers, global and domestic.

Of course this is all about the overseas funds. India has strong domestic flows as well and that is what kept the markets booming for most parts of 2023.

Oil approaching $89 A Barrel

Oil prices are breaking out of their lower trading band and moving higher for the first time since October, as visible via Brent crude prices which are over $88 a barrel.

While the production curbs from the Organisation of Petroleum Exporting Countries like Saudi Arabia and its allies have been in place for several months, prices are now inching up because of demand projections which are seen as higher which was not the case even a few weeks ago. 

Crude is up 11% this year.

Tensions in the middle east which have caused ships to divert away from the Suez Canal to around Africa have also added to the premium risk which also includes problems with Russian supply, hampered in parts by attacks on its oil installations by Ukraine. 

If you want good news this is it. A little over a year ago, traders were projecting and perhaps hoping oil would return to $100 a barrel. But it did not happen.

India, among others, was seen as driving global demand and thus prices up.

Demand is still strong as various agencies have pointed out but not yet sufficient, it appears to take prices to triple digit levels.

For now.

Could Heat Waves Push Up Prices of Agri Products

We reported yesterday that heat waves were expected for 10 to 20 days in different areas during the three-month period ending June 30, against a normal of four to eight days, quoting a top official of the India Meteorological Department. 

Above-normal maximum temperatures are likely over most parts of the country, he had said.

Heat waves will have several points of impact, including workers toiling in the open and of course agricultural products.

The bigger and more immediate concern is inflation. I reached out to Teresa John, an economist with Nirmal Bang Institutional Equities Pvt who has just been working on the correlation between heat waves and inflation. I began by asking how she was seeing the impact of heat waves on the economy right now.

India’s Manufacturing Sector Expands At 16 Year High, Jobs Grow

Perhaps after GDP numbers spiked last quarter to 8.4% rather unexpectedly for even the most bullish of economists, the next number to provide some joy is the manufacturing PMI index.

India’s manufacturing sector in March reached its highest level in 16 years, with production and sales expanding at their fastest rates since October 2020.

HSBC India Manufacturing PMI was at 59.1 in March with the country seeing a near-record increase in input stocks. PMI, short for purchasing managers index, in February was 56.9, the fastest pace in five months. 

Growth can be attributed to a boost in new orders, output, and input stocks, accompanied by renewed job creation, the report said.

In January, it was 56.5. The manufacturing PMI has remained above the crucial 50-mark, indicating growth rather than contraction, for 33 consecutive months.

“India’s March manufacturing PMI rose to its highest level since 2008. Manufacturing companies expanded hiring in response to strong production and new orders. On the back of strong demand and a slight tightening in capacity, input cost inflation picked up in March,” an HSBC economist said.

However, cost pressures reached their highest level in five months. Companies reported increased expenses for essential materials such as cotton, iron, machinery tools, plastics, and steel.

The outlook for the Indian manufacturing sector appears to be a “mixed picture”. Companies remain generally optimistic, with 28 per cent forecasting output growth in the year ahead, however, concerns over inflation persist.

More on that shortly.

How India Inc’s Investment Intentions Measure Up And Where

There has been an improvement in investment announcements in FY24, which though lower than FY23, is higher than all other periods in the last 10 years. 

These are only intentions which would fructify over a period of time and reflect the mood of companies, a note from BOB Research quoting CMIE data points out. 

Among the investment intentions, there is a concentration in segments related to government spending besides electricity and transport services.

The current figure is Rs 27 lakh crore. Incidentally, these numbers include private and public sector intentions but airlines – remember all those mega orders on Airbus and Boeing – makeup for a large part of overall intentions for last year.

Chemicals, electricity and transport that is mostly airlines was 72%. So if you are trying to form an opinion on the mega growth sectors this is it.

The question of course is what is the rough conversion from intention to onground investments and how do other data points triangulate.

I reached out to Madan Sabnavis, Chief Economist at BOB Research and began by asking him what do these numbers translate to and also about capacity utilisation levels in Indian industry right now which are a good indicator of overall activity, following from our earlier manufacturing PMI numbers, as well as a pointer to fresh investments ahead.

Why Indian Airlines Get Blindsided By Crisis

In September 2023, 40 pilots of newly launched Akasa Air’s 450 pilots quit without any notice.

They quit because they were poached by a rival airline.

I don’t know if Vistara was the or one of the rival airlines but that is not the point here. 

Akasa had to cancel some 600 flights in August, it told a court when filing cases against the pilots for breaking the contracts.

Vistara pilots have for the last two days been staging walk-outs Lufthansa style apparently over the lower compensation they would get when Vistara would get merged into Air India. Both are owned by the Tata Group.

Thanks to the walkouts, scores of flights have been cancelled in the last two days, putting considerable strain on passengers who are of course finding out about the cancellations after travelling maybe two hours or more to reach the airport, like in Bangalore.

On social media, one passenger said the pilot walked out after they boarded the flight.

At this point, it does appear that a merger between Vistara and Air India, while fully logical, would likely be a disaster for Vistara for some time because it operates on a much higher level of efficiency and freshness and comes with a baggage-free existence. I don’t mean the baggage you check in while travelling.

The pilot walking out is the first sign of trouble. 

But let’s see the broader context. First, India’s aviation sector is exploding, including via the airline orders that we just referred to, among the highest in the world.

India’s domestic air passenger traffic grew 8.34 per cent year-on year to 152 million in calendar year 2023.

So this means that there will be trouble at various points, including during winter which saw cascading delays as we saw a few months ago.

Or December 2022 when massive lines at security check and immigration in Delhi leading in turn to frayed tempers and missed flights triggered a visit by the aviation minister to the airport to take stock.

Bottomline, for one reason or another, airlines will face problems.

There are two problems with the Vistara situation which I think is an insight and a lesson.

First, it’s an intelligence failure. Pilots wake up one morning and decide to walk out. If it’s a move that could surely jeopardise their job, even for a very short time, they would have had some consultation and thinking through.

The airline obviously was aware that pilots were unhappy and how much perhaps not. And surely not the action that would follow.

Second is that regardless of what the specific action is, bad weather, long lines or pilots getting poached mid-flight, in a manner of speaking, airlines have to have better response mechanisms.

Which is that passengers have to be told via this thing called the mobile phone that there is a delay or cancellation.

The wording of these things is of course tricky because airlines precisely don’t want to announce cancellations when they are trying to fix the problem in time.

But this goes back to intelligence and of course a better standard operating procedure SOP when things go wrong.

The experiences of the last year and a half tell us that airlines have been very poor in managing their own responses and communications which has typically made the crisis worse.

There will be more such challenges going ahead, once again, the context of a rapidly growing industry. Airlines should be better prepared and geared to communicate better with their customers and passengers.

There is nothing like too much communication.

Meanwhile, the  Bureau of Civil Aviation Security (BCAS), which oversees aviation safety in India has allowed  passengers to disembark the aircraft and move to the departure terminal if their flight gets delayed due to bad weather, medical emergencies onboard, or technical issues. 

This replaces the previous practice of keeping passengers confined inside the plane for potentially long periods.

Of course you might ask why it took so many years for us to realise something that many global airports don’t have a problem with. For example, most US airports have common arrival and departure gates, at least for domestic travel. Not in India where we build twice or three times the infrastructure for the same outcome.

But as they always say. Better late than never

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