As India’s stock market soared to new heights in December, there is a noticeable deceleration in the country’s manufacturing sector. The HSBC Purchasing Managers’ Index (PMI) recorded an 18-month low of 54.9 in December, down from November’s 56. The index, which indicates expansion above 50 and contraction below, reveals a shift in momentum for the manufacturing industry.
The latest PMI reading, although still above the long-term trend, marked the lowest quarterly average (55.5) since the first quarter of the fiscal year 2023.
Factors responsible for the slowdown
A combination of unfavourable factors has contributed to this dip, with the pace of new order growth slowing to the lowest in a year and a half.
Despite international orders continuing to rise for the 21st consecutive month in December, both new export sales and output experienced a noticeable slowdown.
Pranjul Bhandari, Chief India Economist at HSBC, expressed, “India’s manufacturing sector continued to expand in December, although at a softer pace, following an uptick in the previous month. Growth of both output and new orders softened, but on the other hand, the future output index rose since November.”
Manufacturers are cautiously optimistic about the future, citing improved customer relations and new inquiries. However, demand softened slightly last month, leading to a decline in the new orders sub-index to 57.3, its lowest since June 2022. Concurrently, output growth hit its slowest pace in 14 months.
International demand also exhibited a slowdown, with export growth reaching a six-month low. This had a direct impact on hiring, which increased at the slowest rate in nine months.
While input costs and prices charged remained relatively stable from the previous month, the pace of output inflation exceeded that of input prices for a fourth consecutive month. This suggests that factories were still able to pass on additional costs to customers.
The Reserve Bank of India is not expected to consider easing monetary policy until the quarter ending September of this year. This timeline aligns with projections of inflation reaching the central bank’s medium-term target of 4.00%.
While the Indian manufacturing sector faces headwinds amid global contractions, there is cautious optimism among manufacturers about the coming year. The industry is grappling with softer demand and a slowdown in international orders, emphasizing the need for strategic measures to navigate these challenging times.
