India's May factory growth slips to three-month-low but stays strong, says PMI data

India’s manufacturing activity slipped to a three-month low of 57.5 in May as intense heatwaves led to reduced working hours, impacting volumes, according to a survey by S&P Global released on Monday.

The HSBC final India Manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, eased to 57.5 in May from 58.8 in April. The May reading was also less than the flash projection of 58.4.

However, the index has remained above its long-run average and also above the 50-mark, which separates contraction from expansion, for nearly three years now.

"India's manufacturing sector remained firmly in expansion midway through the first fiscal quarter, despite a mild loss of growth momentum," the survey report noted. "New orders also rose at a softer pace, but international sales increased to the greatest extent in over 13 years."

Growth amid challenges 

"The manufacturing sector remained in expansionary territory in May, albeit the pace of expansion slowed, led by a softer rise in new orders and output. Panellists cited heatwaves as a reason for lower work hours in May, which may have affected production volumes," said Maitreyi Das, global economist at HSBC. "In contrast, new export orders rose at the fastest pace in over 13 years, with a broad-based demand across geography," Das added.

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The May report highlighted stronger increases in both input costs and output charges, noting a further upturn in Indian factory production, stretching the current sequence of expansion to nearly three years. 

Despite easing to a three-month low, the rate of increase in manufacturing remained sharp in May, supported by new business gains, demand strength, and successful marketing efforts, the survey added.

"On the price front, higher raw material and freight costs led to a rise in input prices. Manufacturers were only able to pass on a part of this increase to consumers, resulting in a squeeze in manufacturing margins," Das said. "The positive news is that May recorded the highest level of positive sentiment among manufacturing firms in just under a decade, resulting in increased job creation," Das added.

Incidentally, Gross Domestic Product (GDP) for fiscal year 2024 (FY24) expanded at a blistering 8.2%, supported by a strong 7.8% growth in the January-March quarter, according to government data released last week. The push to GDP growth came from several key sectors, including manufacturing, construction, mining, and services.

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The Reserve Bank of India (RBI) expects real GDP growth to be 7% in FY25. Meanwhile, projections of a normal monsoon bode well for agriculture output growth, with the government’s robust capital expenditure, strong investment demand, and upbeat consumer and business sentiment making the Indian economy resilient. However, geopolitical tensions and the divergence of monetary easing paths of major central banks pose policy uncertainty.

"New orders rose at a substantial pace that was nonetheless the slowest in three months. The rise was associated with marketing efforts, demand strength, and favourable economic conditions," the survey said. "Growth was reportedly stymied by competition and election-related disruptions," it added.

India's economic goals

India aims to grow into a $10 trillion economy over the next decade, fuelled by manufacturing growth. The push for manufacturing growth is expected in sunrise sectors such as semiconductors, electronics manufacturing, the electric vehicles ecosystem, renewable energy, and defence, according to a recent report by Boston Consulting Group and Matrix Partners.

To this extent, the Centre has stepped up its capital expenditure budget in recent years to improve the country’s creaking infrastructure, create jobs, and push manufacturing to accelerate economic growth. 

The government has also announced production-linked incentive (PLI) schemes across 14 key sectors in 2020 with an outlay of ₹1.97 trillion (over $26 billion) for five years starting 2021-22 to enhance manufacturing capabilities. 

The government's capital expenditure on infrastructure projects was raised to ₹11.11 trillion for the financial year starting 1 April 2024.

As things stand, India remains the fastest-growing major economy in the world, aided by a rise in manufacturing, construction, mining, and services sectors.

“Elsewhere, the survey highlighted sustained growth of input purchasing among Indian goods producers,” the survey said. “Buying levels rose at the slowest pace in four months, albeit one that was historically substantial," it added.

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