India’s manufacturing sector has taken a significant hit, reaching its lowest growth level in 14 months. According to the seasonally adjusted HSBC India Manufacturing Purchasing Managers’ Index (PMI), February recorded a reading of 56.3, marking a steep decline from January’s 57.7. Despite staying within the expansionary zone, this downward trend signals serious concerns about industrial production and overall economic growth.
The decline in manufacturing output is primarily due to a reduction in production growth and new contracts. Several key factors, including global economic slowdown, rising raw material costs, and weakened domestic demand, have played a role in this decline.
A Positive Outlook Amidst Weak Production Growth
While production growth slowed significantly, India’s manufacturing sector maintained a positive trajectory in February. The new export orders continued to rise, indicating robust global demand for Indian-manufactured goods. This resilience suggests that India’s manufacturing industry still holds strong competitive advantages on the global stage.
The February PMI survey also revealed that Indian manufacturers are actively working to expand their workforce, a trend that has continued for several months. This increase in employment opportunities suggests that companies are still optimistic about future demand and production capacity.
Manufacturing PMI Decline: Key Reasons
1. Reduction in Domestic Demand
Despite strong export orders, domestic demand for manufactured goods has declined. Consumers and businesses are exhibiting cautious spending behavior, leading to lower order volumes and delayed procurement decisions.
2. Input Cost Inflation
Manufacturers have faced rising input costs, with raw materials and transportation expenses surging. This has put pressure on profit margins and forced several manufacturers to adjust their production output.
3. Global Economic Headwinds
The global economic slowdown has contributed to declining demand for certain industrial products. Geopolitical uncertainties, supply chain disruptions, and fluctuating commodity prices have further dampened growth prospects.
4. Policy and Regulatory Challenges
While government initiatives like ‘Make in India’ and production-linked incentive (PLI) schemes have provided a boost to manufacturing, compliance and regulatory challenges have continued to impact growth trajectories.
January’s Performance and the Downward Shift
In January, India’s Manufacturing PMI stood at 57.7, rebounding from December’s 12-month low of 56.4. The increase in January was fueled by a 14-year record rise in export orders and a sharp surge in new contracts. However, February’s dip suggests that the initial growth momentum has not sustained due to external pressures and shifting economic conditions.
GDP Growth and Manufacturing Impact
Despite the decline in manufacturing output, India’s GDP growth remains robust. The October-December quarter (Q3 FY25) recorded a GDP growth of 6.2%, up from the previous quarter’s 5.6%. The rebound was primarily fueled by:
- Increased government and consumer spending
- Strong agricultural output from the Kharif season
- Recovery in rural demand
However, economists caution that a prolonged slowdown in manufacturing growth could impact GDP growth in the coming quarters, given that manufacturing contributes approximately 17% to India’s GDP.
Future Outlook: Challenges and Opportunities
Despite the recent slowdown, the Indian manufacturing sector remains resilient. There are several growth opportunities and key areas of focus that could help the sector recover:
1. Strengthening Domestic Demand
To counter declining demand, businesses and policymakers must stimulate domestic consumption through targeted incentives, tax reforms, and investment in infrastructure.
2. Addressing Supply Chain Issues
India’s supply chain disruptions must be tackled with better logistics infrastructure, domestic manufacturing of critical components, and reduced dependency on global suppliers.
3. Boosting MSMEs and Startups
Micro, Small, and Medium Enterprises (MSMEs) play a vital role in the manufacturing ecosystem. Providing financial assistance, technology adoption incentives, and skill development programs can help boost their contribution to the sector.
4. Enhancing Export Competitiveness
India must focus on improving its export competitiveness by reducing trade barriers, signing beneficial trade agreements, and investing in advanced manufacturing technologies.
5. Strengthening Government Initiatives
Programs like Make in India, Aatmanirbhar Bharat, and PLI schemes must be further expanded and streamlined to ensure long-term industrial growth.
