Indian manufacturers’ confidence has taken a hit. There may be more pain ahead.

The pace of business activity in India’s manufacturing sector has slowed down a bit. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index fell to 57.5 in August from 58.1 in July, but remained above the historical average of 54. A reading above 50 indicates expansion.

A slower increase in new business and production are reasons attributed to the moderation in August. Changes in consumer preferences and competitive pressures were cited as factors that hurt manufacturers. New export orders also increased at the weakest pace since the start of CY24. Only one in 10 firms noted an improvement in international sales aided by demand from Asia, Africa, Europe and the US.

Despite declining input cost pressures, manufacturers continued to raise selling prices. In fact, the rate of output charge inflation was the second-fastest in almost 11 years. While this could boost near-term margins of manufacturers, on the flipside, elevated selling prices could weigh on demand prospects, especially for discretionary products. Job creation in the sector also softened in August.

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Most importantly, the business confidence of Indian manufacturers was hampered. Panelists were the least optimistic they have been since April 2023, with the PMI sub-index that measures this sliding to 62.1.

Rocky road ahead

The road ahead for the Indian manufacturing sector may be rough. The year-over-year signal from the PMIs continues to fade, even though the indices themselves remain historically elevated, said economists at Pantheon Macroeconomics. “The quarterly averages of the manufacturing and services gauges for Q3 so far stand at 58 and 60.3, respectively, down minimally from 58.2 and 60.5 in Q2. On a year-over-year basis, however, the moderation is starker,” said the report dated 2 September.

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Moreover, India’s gross domestic product (GDP) growth in the June quarter (Q1FY25) softened to 6.7% year-on-year and was the lowest it has been in the past five quarters. A worry is that the fall in India's GDP growth may become pronounced in FY25, owing to various factors. “Amid the high FY24 base (8.2%), FY25E GDP growth is likely to sharply ease to around 6.5%,” said an Emkay Global Financial Services report dated 30 August. Slower growth would be due to a slowdown in manufacturing and a not-too-exciting urban consumption story, it added.

Given this, a key variable to monitor is when the Reserve Bank of India (RBI) starts to cut interest rates. Here, the trajectory of inflation will be crucial. The impressive progress of the monsoon in August is expected to tame vegetable inflation, which could buoy the overall August retail inflation data. A subsiding inflation print in the range of the RBI's comfort zone could translate to a rate cut in October.

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