India’s manufacturing sector braces for slow growth

Hard data for Q1CY24 show momentum remains mixed, with growth in the core infrastructure index slowing to a 15-month low in January, said economists at Barclays Securities.(Image: Pixabay)
Hard data for Q1CY24 show momentum remains mixed, with growth in the core infrastructure index slowing to a 15-month low in January, said economists at Barclays Securities.(Image: Pixabay)

Summary

  • Household consumption is likely to moderate due to tightening of restrictions on unsecured lending

Business activity in India's manufacturing sector is showing signs of improvement. The seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index (PMI) rose to 56.9 in February from 56.5 in January. A figure above 50 indicates expansion. 

The improvement, albeit marginal, was aided by higher domestic and international orders coupled with lower input costs. In effect, the headline index hit a five-month high and was also higher than Asian peers.

“New export orders rose at the fastest rate in nearly two years, with anecdotal evidence highlighting Australia, Bangladesh, Brazil, Canada, mainland China, Europe, Indonesia, the US and UAE as sources of demand growth," said the survey report. The index gauging this component jumped to 56.7 in February from 53.7 in January.

Manufacturers are seeing some respite from cost inflation, with the index measuring input price trends continuing to decline in February. Additionally, the input price index was lower than the output price index, suggesting that manufacturing firms are enjoying pricing power.

Recall that in December 2023, the headline manufacturing PMI had sunk to an 18-month low of 54.9. Against that backdrop, this recovery is positive and is driving optimism among Indian manufacturers regarding the production outlook. The Future Output Index gauging business confidence stood at an elevated 66.3 in February.

However, despite the upbeat mood, there can be some hurdles. India’s manufacturing gross value added data for the December quarter, showed an 11.6% year-on-year growth. This was driven by margin improvement and a low base, with volume growth moderating in the quarter. Further, hard data for Q1CY24 show momentum remains mixed, with growth in the core infrastructure index slowing to a 15-month low in January, said economists at Barclays Securities (India). In short, some moderation is on the cards in the ongoing quarter.

Note that the actual headline PMI was higher than the flash PMI reading of 56.7 which was released on 22 February. But here comes a word of caution. 

Though activity data such as the flash PMIs suggest that the economy has made a flying start to 2024, the momentum may fade slightly, Thamashi De Silva, assistant India economist, Capital Economics said in a note. Household consumption is likely to moderate as a result of the tightening of restrictions on unsecured lending and global economic pressures are likely to weigh further on exports, she added.

On the bright side, the government’s thrust on infrastructure could compensate for weak consumption to some extent, thus curbing a sharp slowdown. That said, the prospects of an immediate interest rate cut by the Reserve Bank of India (RBI) are low. In fact, according to De Silva, RBI may start policy easing only in the third quarter of 2024, much later than most of the other major emerging markets.

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