Seasonal headwinds for India’s manufacturing sector

A reading above 50 indicates expansion. The latest print is above the long-term average, but lower than the preliminary estimate (Flash PMI) of 58.4.

New orders rose at the slowest pace in three months in May. The slowdown in business activity was attributed to reduced working hours amid the scorching heat. Elevated competition and election-related disruptions also played spoilsport. Plus, production costs rose - mainly freight, raw materials and employee expenses as hiring picked up.

Also Read: India’s May factory growth slips to three-month-low but stays strong, says PMI data

Consequently, the PMI sub-index measuring input costs rose to 54.4. In response, manufacturers raised selling prices in May, with output price PMI at 52.8.

Economists at Barclays Bank pointed out that the gap (between input and output prices) is still relatively subdued compared with the surge in input costs seen in 2021-22. However, PMI readings show that after remaining lower since September, input costs are now higher than selling prices. Thus, pointing to a margin pressure for manufacturing firms as tailwinds from softer input costs may diminish.

Even so, the sentiment among Indian manufacturers on growth prospects was upbeat. The PMI gauge of business optimism rose to a nearly nine-and-a-half years high in May. This confidence was fuelled by advertising and innovation, alongside expectations that economic and demand conditions will remain favourable, said the survey report. However, potential downside risks cannot be overlooked.

The India MeteorologicalDepartment forecasts above-normal rainfall this year. However, spatial distribution in agricultural states remains crucial not only from the perspective of retail inflation, but also rural demand, which has been sluggish lately.

In April, inflation measured via the consumer price index (CPI) was sticky at 4.8% versus 4.9% in March. Given the heatwaves experienced in most parts of the county, the inflation reading for May is unlikely to change much. Further, both at the macro and micro level, there is a looming threat from elevated global crude oil and commodity (aluminium and copper) prices.

Going by the estimates ofSonal Badhan, economist atBank of Baroda, a $10 per barrel increase in crude oil prices, leads to 40-60 basis points increase in India’s CPI.

Against this backdrop, the RBI’s upcoming monetary policy meeting on 7 June is important. Wide-held expectations are that the central bank will maintain status quo on rate, however, the timeline of interest rate cut may get delayed depending on RBI’s inflation outlook. So, whether RBI will revise its current inflation forecast of 4.5% for FY25 remains to be seen.

Meanwhile, the international sales trajectory was a bright spot in the May PMI survey. The upturn in exports was the strongest in over 13 years as firms noted gains from customers across several countries in Africa, Asia, the Americas, Europe and the Middle East, according to the PMI report.

While strong external demand is positive, India’s economic growth momentum hinges on domestic consumption. India’s gross domestic product (GDP) growth in the March quarter of 2024 was at a solid 7.8% year-on-year. But as Nomura points out, the surprising contradiction of core inflation easing to around 3%, even as GDP growth is trending at over 7% likely in part, reflects weaker underlying demand.

“What is currently missing from India’s growth story is a consumption recovery, encompassing the rural sector and a broad-based recovery in private capex above and beyond the pockets that have benefited from the strong focus on public capex," added the Nomura report dated 1 June.

Also read: Gone are the days when a manufacturing boom would create good jobs