Heatwaves and Cost Pressures Impact Manufacturing PMI, Hits 3-Month Low

In May, India’s manufacturing sector witnessed a decline in activity, with the Purchasing Managers’ Index (PMI) dropping to 57.5 from 58.8 in the previous month. This decrease, reported by a private survey conducted by HSBC, was attributed to heatwaves and escalating production costs, impacting new orders, output, and overall productivity for manufacturing firms.

According to a global economist, the slower expansion pace was primarily driven by a subdued increase in new orders and output. The scorching heatwaves experienced in May led to reduced work hours, consequently affecting production volumes across the sector. Despite the softening of manufacturing activity, the business sentiment remained optimistic, reaching its highest level in nine-and-a-half years. This positive outlook was fueled by expectations of favorable demand conditions, resulting in heightened job creation within the sector.

The robust performance of the Indian economy, which expanded by 8.2% in FY24, surpassing earlier government estimates, further bolstered confidence in the manufacturing sector. Experts predict continued momentum in the current fiscal year, with growth averaging around 7%. Notably, the seasonally adjusted HSBC India Manufacturing PMI remained significantly above the long-run average, buoyed by strong exports and successful marketing strategies. This growth was accompanied by a notable rise in manufacturing employment, reaching levels unseen since data collection began in March 2005.

However, the uptick in job creation exerted pressure on prices, with input inflation rising to its highest level since August 2022. Despite India Inc. demonstrating pricing power, evidenced by an increase in charge inflation to an eight-month high, the escalating costs pose a challenge to profit margins and warrant close monitoring.

As the manufacturing sector navigates through challenges posed by rising costs and heatwaves, maintaining resilience and adaptability will be crucial in sustaining growth momentum and ensuring long-term viability.