India's manufacturing sector growth eases in July amid softer increases in new orders and output

New Delhi: India’s manufacturing activity fell slightly in July, amid softer increases in new orders and output. Manufacturing activity had recovered in June after hitting a three-month-low in May.

The HSBC final India Manufacturing Purchasing Managers Index (PMI), compiled by S&P Global, stood at 58.1 in July, after clocking 58.3 in June, 57.5 in May, and 58.8 in April. The index is based on responses to questionnaires sent to around 400 manufacturers.

The July reading was slightly lower than the flash projection of 58.5 released last month. However, the index has remained above both its long-term average and the 50-point mark, which separates contraction from expansion, for nearly three years.

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"India's manufacturing sector continued to post impressive growth in July, despite slightly softer increases in new orders and output. Key positive developments in the latest results included one of the fastest expansions in international sales for over 13 years and another robust round of job creation," the report said.

"That said, buoyant demand also exerted pressure on prices. Input costs rose at one of the quickest rates in nearly two years, contributing to the steepest increase in selling prices since October 2013," it added.

Buoyant demand

The report said buoyant demand created a ripple effect across the manufacturing industry, mainly through a substantial increase in new work intakes.

Despite slowing since June, the pace of sales growth remained sharp as production volumes were raised substantially at the start of the second fiscal quarter, it added.

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“India’s headline manufacturing PMI showed a marginal slowdown in the pace of expansion in July, but with most components remaining at robust levels, the small drop is no cause for concern," said Pranjul Bhandari, chief India economist at HSBC.

"New export orders remain a bright spot… The continuous increase in the output price index, driven by input and labour cost pressure, may signal further inflationary pressure in the economy," Bhandari added.

Normal monsoon predicted

The Reserve Bank of India (RBI) has raised its FY25 GDP growth forecast from 7% to 7.2% on the back of improved rural and urban demand and predictions of a normal monsoon.

The monsoon predictions bode well for agricultural output growth, with the government’s robust capital expenditure, strong investment demand, and upbeat consumer and business sentiment making the Indian economy resilient, the report said. However, geopolitical tensions and the divergence of monetary policies of major central banks have raised uncertainty.

The RBI's Monetary Policy Committee kept the benchmark rate at 6.25% at its meeting in June. Retail inflation, which spiked to a four-month high of 5.08% in June, presents a challenge to policymakers on reducing interest rates. The rise in June was due to higher food inflation, which accounts for nearly 40% of the consumer price basket.

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The PMI report said, “Indian goods producers sought to protect margins from cost increases by raising selling prices. In addition to greater fees for raw materials, firms suggested that higher labour costs and demand strength sparked upward adjustments to output charges.”

"Amid reports of strengthening demand from clients based in Asia, Europe, North America and the Middle East, Indian manufacturers experienced a robust increase in international sales during July," it added.