The momentum in business activity in India’s manufacturing sector has bounced back. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index (PMI) rose to 58.3 in June from a three-month low of 57.5 in May. A reading above 50 indicates expansion.
The headline index remains well above the long-term average, but the June final reading was slightly below the preliminary estimate (Flash PMI) of 58.5.
The improvement in business conditions was attributed to buoyant domestic demand that translated into more new orders. The PMI sub-index tracking new export orders saw a slower rate of expansion in June compared to May. But given the slow growth in developed economies, trends in exports must be watched.
For now, to meet higher demand, Indian manufacturers havepushed the pedal on hiring. In fact, the rate of job creation in the Indian manufacturing sector was sharp and the strongest seen since PMI data collection began in March 2005. But consequently, staff expenses rose in June.
Higher costs, higher prices
This comes at a time when input cost pressures are already elevated. Rising material (aluminium, plastic and steel) and transportation costs caused overall increase in manufacturers’ operating expenses.
The rate of input price inflation has eased since May, but was nonetheless among the highest since August 2022.
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As things stand, solid demand has meant companies are enjoying pricing power. They continue to pass on the burden of increased costs to end-consumers in the form of price hikes. Selling charges were raised to the greatest extent in over two years in June, said the PMI report. For how long this pricing power lasts will depend largely on sustenance of demand.
Tempered optimism
Nearly 29% of those surveyed for the report expect manufacturing output to grow over the coming year. According to the PMI report, firms are forecasting further improvements in demand and order book volumes in the year ahead, with advertising and greater client enquiries underpinning the optimism.
Even so, the overall level of confidence among Indian manufacturers receded to a three-month low in June. The Future Output index—a PMI gauge of business optimism—declined to 64 in June from 67.4 in May.
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A look at the actual data of various macro-economic parameters points to some downside risks to India’s gross domestic product (GDP) growth in financial year 2024-25. For instance, the sluggishness in domestic demand remains a concern.
“Retail sales growth in May, based on the Retailers Association of India’s survey, fell deeper into the red in May on a CPI-adjusted basis, dropping to -1.7% year-over-year, from -0.8%, representing the fifth negative reading in six months, said economists at Pantheon Macroeconomics in a recent report.
Also, the seasonally and CPI-adjusted goods and services tax revenue growth—a broader gauge for spending activity—has been treading at a soft 5%-plus since the beginning of 2024, it added.
Monsoon jitters
Worries of a lower-than-anticipated monsoon are also creeping up now. Lower reservoir levels and an insufficient monsoon are feared to add pressure on the rural economy. If this plays out it could weigh on rural incomes and further delay rural demand recovery.
The impact would also be felt on the inflation trajectory and interest rate-cut expectations.
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The minutes of the Reserve Bank of India’s June policy meeting show that two external members voted for a 25-basis point interest rate cut. However, hopes of a rate cut could get dashed due to elevated inflation. Businesses would also feel the heat.
“The pace of manufacturing GVA (gross value added) may slow in FY24-25 from the elevated levels in FY23-24, as higher input costs may reduce growth in firms’ profits in year-on-year terms,” Barclays said in a report.
Overall, Barclays expects India’s GDP growth to moderate to 7% in FY25 from 8.2% in FY24.
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