Business momentum in India’s manufacturing sector has further softened a bit. The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) was at 57.7 in July, a tad lower than 57.8 in June. This was due to the marginal easing in output and new orders. A reading above 50 indicates expansion.
The headline index remains well in the expansion zone, but the latest reading is at a three-month low. In May, the PMI index had hit a multi-month high, indicating that the Indian economy was holding up well, largely aided by resilient domestic demand.
“But today’s PMI survey adds to evidence elsewhere that activity is coming off the boil. For example, latest Dun & Bradstreet Business Expectation Survey for Q2 shows that firms have become less optimistic on profits,” said Thamashi De Silva, assistant India economist, Capital Economics, in a note. What is more, now there are clearer signs of a turn in the credit growth cycle, she added.
In a turn of events, the rate of input cost inflation surged to a nine-month high last month. Increase in raw material and labour costs primarily drove this up move. Even though firms passed on the pressure through selling prices, output price inflation slid to a three-month low, indicating that the strong pricing power that manufacturing firms have been enjoying lately, has moderated.
If this trend sustains, it could weigh on the profitability outlook of Indian manufacturers. On the macro front, sticky inflation could make the Reserve Bank of India’s job tougher, delaying the Street’s rate cut expectations. In recent weeks, uneven rainfall has led to concerns over the trajectory of food inflation, especially perishables.
Surprisingly, manufacturing exports did well. Growth in new export business picked up to the fastest pace since November, according to the PMI survey. Respondents said there were increases in new orders from American customers, and neighbouring countries such as Bangladesh and Nepal. But given the demand weakness still prevailing in developed economies, the up move in exports may not sustain. “We expect overall exports to decline in FY24 as global growth slows down and commodity prices remain range-bound. Labour markets in developed markets (DM) remain tight, resulting in wage growth holding-up despite moderation in growth conditions,” Gaura Sen Gupta, economist at IDFC First Bank, said. The combination of strong labour markets and inflation above target levels, will keep DM policy rates higher for longer, she added.
For now, Indian manufacturers expect demand to remain elevated over the coming year, supporting projections of production growth. The Future Output Index, a gauge of business confidence among manufacturers, was above the series average, but fell a bit in July as compared to June.
The way ahead could be bumpy with growth in manufacturing expected to slow further amid tighter fiscal condition and anaemic global demand as higher policy rates feed into the economy. Consequently, it would have some bearing on the gross domestic product (GDP) growth in FY24.
“Growth in cargo traffic, railway freight, vehicle production, and power and fuel consumption has slowed in the past two months. It was expected, as the arrival of monsoon typically slows both mobility and factory production, and slower exports weigh on manufacturing activity,” said a Barclays Securities (India) report dated 1 August. Barclays estimates India’s GDP to grow 6.3% in FY24 against 7.2% in FY23.
India’s economic growth in FY24 is expected to be supported by the government’s thrust on capital expenditure and healthy urban consumption, keeping India in relatively better shape than many Asian peers.
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Updated: 01 Aug 2023, 09:00 PM IST