BENGALURU - Activity in India's manufacturing sector expanded at its weakest pace in five months in March as order and production growth slowed, discouraging firms from hiring, a business survey showed on Tuesday.
Orders softened despite manufacturers keeping price increases to a minimum, suggesting retail inflation will remain near the Reserve Bank of India's medium-term target of 4 percent and reinforcing views it will hold interest rates steady this year.
The Nikkei Manufacturing Purchasing Managers' Index, compiled by IHS Markit, fell to 51.0 last month from February's 52.1, well short of a Reuters poll median of 52.8.
But it held above the 50-point threshold mark that separates growth from contraction for the eighth straight month.
"India's manufacturing sector continued to grow, albeit at the weakest pace since October, reflecting weaker gains in new business," Aashna Dodhia, an economist at IHS Markit, said in a release.
"PMI employment data signalled warning signs in the labour market as jobs growth was not sustained in March amid reports of spare operating capacity."
Firms shed staff for the first time in eight months, concerning for the world's seventh-largest economy as it tries to power-up its manufacturing sector.
That could add to pressure on Prime Minister Narendra Modi's government ahead of next year's general elections after it won power in 2014 by emphasising policies to generate employment.
Former RBI Governor Raghuram Rajan raised concerns about job creation last month, noting India's economic growth rate of 7.5 percent would not be sufficient to provide employment to the 12 million people added to the labour force every year.
Giving scant reason for optimism, the new orders sub-index, a proxy for domestic demand, has been on a downtrend for three months and slumped to a five-month low of 51.5.
Optimism about future output also remained weak in March.
"Amid a slower expected pace of recovery in consumer spending, IHS Markit marginally downgraded its real GDP forecast to 7.3 percent for fiscal year 2017/2018," Dodhia said.
Foreign demand for Indian manufactured goods also slipped to a four-month low amid growing fears of a trade war between the United States and China that could have a domino effect across the globe.
However, the impact of President Donald Trump's tariffs on imports of steel and aluminium will have limited impact on India as IHS Markit said exports of the two metals to the U.S. accounts for just 0.4 percent of total merchandise exports.
"On a negative note, further advances in trade disputes could potentially weigh on sales to international clients," Dodhia noted.