Weak data shows global slowdown digs deep in India

Employees work in a factory at Ranjangaon, Mumbai in this April 2, 2007 file photo.

MUMBAI (Reuters) - Indian manufacturing activity contracted for a fifth straight month in March and exports fell in February as the global economic downturn depressed demand and the outlook remains clouded by uncertainties.

The ABN AMRO Bank purchasing managers' index (PMI), based on a survey of 500 companies, rose to a seasonally adjusted 49.5 in February from January's 47.0.

The index showed signs of slight improvement after hitting a trough of 44.4 in December. A reading above 50 signals economic expansion while a figure below 50 suggests contraction.

Exports fell an annual 21.7 percent in February to $11.91 billion, government data showed on Wednesday, a fifth straight fall as the global slowdown slashed demand for Indian goods.

Analysts said the two data on Wednesday pointed to pain for the economy.

"The economic situation has not improved from the last quarter. Overall, data on exports, imports and manufacturing PMI are all showing a decline," said N.R. Bhanumurthy, economist at Institute of Economic Growth.

Asia's third largest economy is expected to have grown at its slowest pace in six years in the 2008/09 fiscal year that ended on Tuesday, with the expansion projected to slow down further in the current year.

"We expect exports to decline in March and April also," Bhanumurthy said, but monetary and fiscal steps would ease some pressure and the industrial output in March may show positive growth.

POLITICAL, EXTERNAL

Manufacturing makes up about 16 percent of India's gross domestic product.

"On the whole, it appears that business conditions in the manufacturing sector are gradually improving," said Gaurav Kapur, senior economist at ABN AMRO Bank.

"It appears that domestic demand is picking up. External demand, however, remains weak and contracted in March too, for the sixth consecutive month," he said.

This was reflected in the exports data, which fell for the fifth straight month as well. The trade deficit narrowed to $4.9 billion in February from $6.1 billion in January.

Asian countries that rely heavily on manufactured exports have been hit hard by the global financial crisis that has prompted Western consumers to curtail spending.

"While we see a contraction in exports to continue, we expect the contraction in imports to be much stronger," said Shubhada Rao, chief economist at Yes Bank.

"As such we expect the trade deficit to narrow for the January-March quarter, compared with the third quarter."

For April to February, the first 11 months of the past fiscal year, exports rose 7.3 percent to $156.6 billion from a year earlier, while the trade deficit climbed to $115.1 billion from $82.2 billion.

India's economy is expected to have grown about 7 percent in the 2008/09, after growing at 9 percent or more in the previous three fiscal years.

Political worries remain with only piecemeal pro-market reforms seen after the general election in April and May, a Reuters poll of 14 leading analysts has predicted.

An alliance led by the ruling Congress party has lost ground over the last week amid coalition squabbles and may need leftist support to win office, the analysts added.

Authorities have taken a number steps including sharp rate cuts to shore up demand.

The key short-term lending rate has been cut by 400 basis points in five moves to stand at 5 percent.

The PMI survey, which is compiled by UK-based Markit Group, comes well ahead of official statistics.

(Additional reporting by Anurag Joshi; Writing by Surojit Gupta)