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The pace of business activity in India’s manufacturing sector is slowing, dimming hopes for those rooting for a sharp rebound in gross domestic product (GDP) growth. The seasonally adjusted , slightly below November’s 56.5.
Sure, a reading above 50 indicates expansion, but it offers little comfort this time. The latest reading also marks the second consecutive monthly drop, with the final December PMI also falling short of the flash estimate of 57.4, further tempering initial optimism.
Increased competition and cost pressures emerged as the villains, leading to a weaker-than-expected improvement in operating conditions for manufacturers. Overall expenses climbed as costs of container, material and labour increased. In response to these rising costs and to protect margins, manufacturers raised selling prices in December.
According to the PMI survey, selling prices increased at a pace that outstripped cost burdens and was significantly higher than the near 20-year series average. “Anecdotal evidence showed that demand resilience supported pricing power," the PMI report noted. But this demand resilience will be put to test sooner than later as downside risks linger with muted urban consumption being a sticky issue.
“Of late, urban consumption has been flagging, and no dependable explanations are available about why wage/income growth has decelerated – it has dropped steadily from 22% year-on-year for Q4FY23 to 8% in Q2FY25 for aggregate wages of NSE500 companies," said an IIFL Securities Ltd report dated 2 January. Remember, pent-up urban consumption demand coupled with a surge in retail credit from banks were among the key factors that led to sharp rebound in India’s economic growth in a post-pandemic world. But now, with a tight monetary policy and the Reserve Bank of India’s crackdown on unsecured, frothy loans, the positive effects of these short-term demand boosters are fading out.
Growth under pressure In the September quarter, India’s GDP growth slid to a seven-quarter low of 5.4% amid the , and the pain may not be over yet. “India is in the midst of a cyclical slowdown, and this evidence of household balance sheet stress chimes with weak income and K-shaped urban consumption demand," Nomura Global Markets Research said in a report dated 2 January.
Nomura expects India’s GDP growth to moderate to 5.9% year-on-year in FY26 from 6% in FY25, this is below consensus estimates of 6.9% (FY25) and 6.
6% (FY26). True, retail inflation has eased recently, with the consumer price index (CPI) declining to 5.48% in November from over 6% in October.
However, a weakening rupee could amplify input cost pressures for manufacturers relying on imported raw materials. Additionally, if the Donald Trump government decides to impose higher tariffs, it could further stoke inflation. In an already competitive scenario, it could be challenging for manufacturers to keep raising selling prices without hurting demand.
So, while Indian manufacturers expect output to rise in 2025 aided by advertising efforts, sentiment remains subdued due to concerns around inflation and competitive pressures, said the PMI report. PMI’s Future Output Index – a gauge for business confidence fell to 62.5 in December from 65.
5 November. “Preliminary estimate for December CPI inflation is tracking at 5.5%, after building-in some moderation in food inflation.
But high frequency indicators show that growth momentum is yet to revive in Q3FY25 despite the festival season," said Gaura Sen Gupta, economist at IDFC First Bank. Sen Gupta cited , electronic payments, and non-oil non-gold imports. On the bright side, rural demand is expected to hold up relatively well, supported by a robust monsoon that has boosted crop output and, in turn, rural incomes.
However, an improvement in rural demand is unlikely to fully counterbalance the weakness in urban demand. Meanwhile, the prospect of higher tariffs under US President Donald Trump could lead manufacturers to front-load shipments, potentially causing a temporary spike in merchandise exports. However, weaker global demand is likely to weigh on the export growth trajectory for Asian economies, including India, in 2025.
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