India's Manufacturing Sector Maintains Resilience Amid Slowdown

India's manufacturing sector has experienced a slight deceleration in growth in August 2024, with the Purchasing Managers' Index (PMI) dropping to a three-month low of 57.5. Despite this dip, the PMI remains above the long-run average of 54, indicating that the sector continues to expand, albeit at a slower pace. This data was revealed in a recent survey conducted by HSBC India. The PMI is a crucial indicator of the economic health of the manufacturing sector, with a reading above 50 indicating expansion and below 50 signifying contraction. The August reading marks the longest expansionary phase in the last 11 years, with the index remaining above the 50-mark since July 2021.

The report attributes the slowdown in growth to softer increases in new business and output. However, these rates of expansion remain elevated by historical standards. Some panellists cited fierce competition as a reason for the slowdown. Despite this, the sector continues to show resilience, with firms scaling up buying levels to safeguard against input shortages. The report also highlighted a significant improvement in pre-production inventories, marking one of the strongest upturns in 19-and-a-half years of data collection. This rise in purchasing activity was supported by a moderation in cost pressures. The rate of input price inflation softened to the slowest in five months, allowing firms to comfortably share additional cost burdens with their clients by lifting selling prices.

Pranjul Bhandari, Chief India Economist at HSBC, noted that while the pace of expansion has moderated slightly, the sector continues to grow. New orders and output also mirrored the headline trend, with some panellists citing fierce competition as a reason for slowdown. Nevertheless, all three indicators remain well above their historical averages," Bhandari added. The business outlook for the coming 12 months remains optimistic, despite a slight moderation in August. This optimism is driven by competitive pressures and inflation concerns. Firms continue to hire additional staff, indicating a positive outlook for employment in the sector.

In July, the manufacturing sector continued to expand robustly, driven by strong domestic demand and new export orders. However, the pace of output price inflation decelerated but to a much smaller extent. The broader market, as indicated by the S&P BSE Sensex and the Nifty 50 index, also showed minor gains. The Sensex and Nifty clocked an all-time high in early trade, despite the broader market underperforming the frontline indices. The seasonally adjusted HSBC India Manufacturing Purchasing Managers Index (PMI) signalled a substantial improvement in operating conditions.

The manufacturing sector's performance is crucial to India's $10-trillion ambition, with growth driven by an expanding manufacturing sector. Key focus areas include semiconductors, electronics manufacturing, the electric vehicle ecosystem, renewable energy, and defence. The central government has ramped up capital expenditure to bolster infrastructure, create jobs, and stimulate manufacturing growth to support this ambition.  The sector continues to show resilience in the face of competitive pressures and inflation concerns, with firms scaling up buying levels and maintaining an optimistic outlook for the future. The moderation in input cost inflation has allowed firms to rebuild safety stocks, indicating a strategic move to secure resources amidst a period of relative cost stability. This resilience and strategic planning bode well for the sector's continued growth and contribution to India's economic ambitions.