Manufacturing growth slows as India’s factory activity hits 12-month low

India’s manufacturing sector ended 2024 on a subdued note, with factory activity growth slowing to its weakest level in a year. The HSBC India Manufacturing Purchasing Managers’ Index (PMI), a barometer of industrial performance, slipped marginally to 56.4 in December 2024 from 56.5 in November.

While still above the 50-point threshold that indicates expansion, the data underscores a deceleration in growth momentum as the sector grapples with cost pressures and tepid domestic demand.

The PMI report highlighted those new orders, a key indicator of future production, grew at their slowest pace in 12 months. Rising costs of materials, containers and labour emerged as significant challenges, with firms reporting increased pressure on profit margins.

In response, manufacturers raised selling prices at a pace that outstripped cost inflation, marking the fastest price hikes in over a decade.

The report attributed the sector’s challenges to heightened competition and lingering inflationary concerns. 'Demand resilience supported pricing power,' the survey noted, but concerns about muted urban consumption and sluggish wage growth remain unresolved.

Urban consumption, a critical driver of manufacturing demand, has been sluggish, with no clear explanation for the trend. Wage growth for NSE500 companies has declined steadily, falling from 22 per cent year-on-year in Q4FY23 to just 8 per cent in Q2FY25, according to a report by IIFL Securities.

This slowdown in disposable income could have long-term implications for domestic demand, potentially hindering the sector’s recovery.

While domestic demand faced headwinds, export orders provided a glimmer of hope, growing at their fastest pace since July. However, analysts cautioned that weaker global demand could weigh on export growth in the coming months.

Despite the slowdown, the manufacturing sector continued to add jobs. December marked the tenth consecutive month of employment growth, with the rate of job creation accelerating to a four-month high. S&P Global reported that 10 per cent of surveyed firms increased their workforce, while fewer than 2 per cent implemented layoffs.

Post-production inventories contracted at the fastest pace in seven months as firms cleared stock to meet strong sales volumes. However, input stockpiling slowed, reflecting cautious optimism. Capacity pressures remained mild, indicating limited need for immediate investments in production expansion.

Inflationary pressures continued to weigh on the sector. Input price inflation moderated in December compared to November, but selling price inflation rose faster, reflecting manufacturers’ efforts to protect margins. Rising costs of essential items like vegetables and pulses have kept overall inflation above 5 per cent, straining household budgets and potentially affecting demand.

The PMI’s Future Output Index, which gauges business confidence, fell from 65.5 in November to 62.5 in December. While manufacturers remain optimistic about increased output in 2025, sentiment is subdued due to inflationary pressures and rising competition.

RBI’s industrial outlook survey revealed declining optimism among manufacturers, with the net response for production output slipping from 27.9 per cent in Q1FY25 to 22.9 per cent in Q2FY25. This marks a significant drop from 34.4 per cent in Q4FY24, indicating a sustained slowdown in growth expectations.

India’s manufacturing growth for Q2FY25 stood at a modest 2.2 per cent, reflecting broader challenges in the industrial sector. The sector’s subdued performance aligns with the Indian economy’s overall slowdown, as GDP growth fell to a seven-quarter low of 5.4 per cent in the second quarter.

India’s manufacturing sector enters 2025 with mixed prospects. While firms are banking on advertising and investment to drive output, concerns about inflation, muted consumption, and global uncertainties persist. For the sector to regain momentum, sustained efforts to address cost pressures, bolster domestic demand, and navigate competitive challenges will be crucial.