Trump led trade wars may be benefiting Indian manufacturing at the cost of China

Impact: Neutral (Overall Manufacturing Sentiment)

Brief: August Manufacturing PMI for India contracts to 51.7. However, subsectors such as New Orders, Orders from Abroad, Rate of Expansion, Rising Staff Levels and Future Outlook have been recording continued growth. Input costs however remain a concern.

The August Manufacturing PMI for India recorded 51.7 – down 60 bps as compared to the July number (52.3). The Manufacturing Purchasing Managers Index (PMI) measures the overall sentiment of the manufacturing segment of an economy by incorporating views from a panel of purchasing managers (sample size); an index over the figure of 50 means expansion.

Despite, this decline, subsectors such as New Orders, Orders from Abroad, Rate of Expansion, Rising Staff Levels and Future Outlook have been recording continued growth. Input costs remain a concern. On the other hand, China, the world's manufacturing powerhouse, which recorded an ever contracting Manufacturing PMI of 50.8 – is experiencing slowdown in New Orders, Declining Staff Levels and unfavorable Future Outlook. This scenario, we reckon is a direct outcome of the US led trade wars and the resultant volatility.

While input costs are a concern for all major economies including the US and India, China's rising costs are attributed to factors such as restructuring costs, environmental hurdles as well as "Proactive Fiscal Policy." Future outlook is also subdued because of the trade tensions which is less so for India. Indian manufacturing, as per the survey and the reflected PMI print states that Employment opportunities and New Orders are in expansionary mode. Even Future Outlook, over the next 12 months remains an optimistic proposition for Indian manufacturers, unlike their Chinese counterparts. Infact, New Orders and Orders from Abroad recorded a continuous expansion in India - tenth month in a row.

While comparing the overall Manufacturing PMI performance of both India and China, we assess that the former has been a consistently better performer over the past few quarters. India's YTD PMI performance for FY19 is recorded at 52 as against 50.8 same time last year. China, on the other hand, recorded a YTD PMI at 51.46 as compared to 51.44. This means that while Indian PMI gained almost 120 bps since last year – the Chinese counterparts gained just 2 bps, therefore remaining stagnant. While it may be too early to assess the situation at the ground level, preliminary diagnosis reveals that the Chinese are indeed under the sun because of the current trade tensions. India perhaps may be benefiting as an emerging alternate manufacturing destination. Having said that, input costs have forced Indian manufacturers (like their American and Chinese counterparts) to increase their selling prices and this we believe may be inflationary in the near term.

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