The Indian Manufacturing sector witnessed a slowdown in the month of May. This can clearly be deduced from the manufacturing Nikkei India PMI that has fallen from 51.6 in April to 51.2 in May.
The Purchasing Managers’ Index (PMI) is an indicator of economic health. A score above 50 refers to economic expansion as compared to the previous month whereas below 50 indicates a contraction and slow down.
May came with a low rate of new work orders, primarily because of the increasing manufacturing cost owing to the hike in oil prices.
The Reserve Bank of India (RBI) might also increase the interest rates due to the inflationary force in the economy.
The resultant weaker expansions in manufacturing output, employment and new business has hampered the growth rate.
The inflation and the increasing manufacturing cost that appear to be the primary reason behind the easing PMI, have a common cause behind the,i.e. the hike in oil prices. Hence, let us understand why the oil prices are in fact so high.
WHY ARE OIL PRICES RISING IN INDIA?
Crude oil prices are hitting highs globally and this is massively affecting the prices in India, especially in the wake of the weakening Rupee against the US Dollar ( though it has risen slightly in the last 3 days ) and this is a primary reason behind the easing PMI.
• The reason behind the consistently rising crude oil prices is the decision of the OPEC (Oil and Petroleum Exporting Countries ), including Russia to curb production in order to tackle the excess supply situation of the previous years.
• Furthermore, the geopolitical tension hovering above the Middle East due to conflicts between Saudi Arabia and Iran is another cause because if Saudi is successful in talking USA into imposing further sanctions on Iran for the renewed nuclear deal crisis, the cut on supplies from Iran will adversely affect the prices.
• US is reportedly considering sanctioning Venezuela’s crude oil industry in order to pressurize Venezuelan President Nicolas Maduro. As per the latest reports from the International Energy Agency (IEA), supplies from Venezuela have slid considerably since February, 2018. Thus, countries like Nigeria and Venezuela have seen a decrease in oil production
• However, USA is utilising it’s distance from OPEC membership, and is delivering record production of oil. The US oil production is surging, with a record 10.619 million barrels per day in May and has remained record high since.
The surge in US’s production is to some extent balancing the lowered production by the OPEC. But the bullish demand in the global market is barely allowing a fall in prices.
Saudi Arabia might further hike oil prices for Asia in the month of July to a record high since 2014. (Read more)
The world economy is suffering from inflation and decreased production growth and prospects of relief seem distant.
However, to focus on the brighter picture, the PMI is above 50, denoting an expansion. We hope the US production surge aids the fall in global oil prices and ultimately leads to the stabilisation of the manufacturing sector in India and around.