The HSBC India Manufacturing Purchasing Managers’ Index (PMI) survey for August paints a grim picture. The seasonally adjusted headline index fell for the third month in a row to 52.8 in August from 53.5 in July. This is the weakest improvement in the sector’s health in five years, and below the long-run average of 54.2.
The loss of business momentum stemmed from output and new orders growth slowing to five-year lows. Firms noted challenging market conditions and weak demand for some products. Input cost pressures receded during the month, with input inflation slowing to its weakest pace in six months. Even so, manufacturers continued to face higher costs for materials, including steel, and transport. Firms had limited bandwidth to raise selling prices. The rate of output charge inflation was slight, the slowest in 45 months and below its long-run trend, said the PMI survey report.
Around 16% of survey participants forecast higher output over the coming 12 months, while the rest expect no change from present levels. The PMI’s Future Output Index, a gauge of business confidence, rose to its highest mark since May, but remained subdued by historical standards.
Caution warranted
Meanwhile, investors should not extrapolate India’s Q1FY27 gross domestic product (GDP) data into future quarters. Despite elevated crude oil prices amid the West Asia war, real GDP rose 7.8% year-on-year, beating Bloomberg consensus estimate of 7.3%, led by increased fixed investments, private consumption and manufacturing growth.
Although high-frequency indicators, such as sales of passenger vehicles, two-wheelers and tractors, were robust in July, caution is warranted. Nomura Research sees four headwinds in H2FY27. “Unfavourable base effects will be at play from Q2FY27 (July-September) onwards, with GDP growth last year averaging around 8% for the next three quarters (reflecting the GST boost),” said a Nomura report on 1 September. It warned that any government expenditure cuts, particularly in capital expenditure, could drag down growth and risk a 20 basis point slippage in the FY27 fiscal deficit target of 4.3% of GDP.
Other potential drags on the economy include squeezed corporate profit margins as companies delay passing on rising input costs, alongside weak agricultural growth and rural consumption caused by deficient monsoons and sluggish Kharif sowing. Against this backdrop, the Reserve Bank of India is widely expected to hold interest rates steady in October.