Manufacturing activity last month fell for the first time since February 2023 but, supported by rising demand for Indian-made factory products, still notched up the year’s second-fastest rate of expansion, a private survey on Monday said.
S&P Global said on Monday that India’s purchasing managers’ index (PMI) for manufacturing fell to 57.8 in June, down from 58.7 in May.
A figure of 50 separates expansion from contraction.
However, higher inflationary pressures remained a key challenge, it said.
“June’s PMI results again showed robust demand for Indian-made products, both in the domestic and international markets. Positive client interest continued to support the manufacturing industry, driving growth of output, employment, quantities of purchases and input stocks,” said Pollyanna De Lima, economics associate director at S&P Global Market Intelligence.
“These positive developments instilled greater confidence into manufacturers regarding growth prospects, boding well for business investment and the labour market,” she added.
Indian manufacturers registered a sharp increase in new work projects and proposals in June—among the strongest seen since February 2021— the report said, adding that in addition to favourable demand conditions, panellists linked the upturn to advertising and new product releases.
“Concurrently, new export orders rose solidly, though at a slower pace than in May,” the report added.
In addition, strong underlying demand stoked business confidence and optimism over the future as business activity rose to its highest this year. This prompted firms to increase their workforces for the third consecutive month.
However, although the employment index was the second-highest since November, the rate of expansion was moderate.
“Supported by buoyant client appetite, manufacturers lifted their selling prices in June. The rate of charge inflation was marked, the strongest in 13 months and above its long-run average. In certain cases, the upturn was attributed to higher labour and input costs,” the report said.
“Although average purchasing prices continued to increase in June, the rate of inflation was mild by historic standards and among the lowest seen over the past three years. To meet rising sales, companies ramped up production in June. The expansion in output was sharp and among the fastest over the past year-and-a-half,” it added.
Charge inflation occurs when companies pass on rising expenses from wages or raw materials to clients.
“Presented with buoyant demand, manufacturers seized the opportunity to adjust their pricing strategies,” said De Lima.
“The latest increase in output charges reflected firms’ ability to pass on higher cost burdens to customers while maintaining a competitive edge,” she added. While inflation is well within the Reserve Bank of India’s (RBI) comfort zone of 2-6%, the central bank has left the door open for future interest rate hikes.
While the RBI has raised interest rates by 250 basis points since May 2022, it has held the repo rate at 6.50% since April. The repo rate is predicted to remain unchanged until next year.
“PMI is still in the expansion zone and the difference is very mild. Now, inflation has also started coming down. We expect moderate manufacturing performance in the coming months. So far the indication is that manufacturing is holding up,” said D.K. Joshi, chief economist at Crisil.