Indian manufacturing growth slows amid global contraction

While the Indian stock market scaled new peaks in December, activity in the manufacturing sector has lost momentum. The HSBC Purchasing Managers' Index (PMI) came in at an 18 month low of 54.9 in December, down from 56 in November. A reading above 50 indicates an expansion and below 50 a contraction.

The latest print was above the long term trend but marked the lowest quarterly average (55.5) since Q1FY23, said the PMI survey report. A combination of unfavourable factors played spoilsport for manufacturers. The pace of increase in new orders was the slowest it has been in a year and a half. Even as international orders continued to rise for the 21st consecutive month in December, new export sales and output were muted.

But elsewhere, the scenario was even less inspiring. The headline PMI for global and ASEAN regions contracted in December, meaning the reading was below 50. Operating conditions in the ASEAN region deteriorated on subdued new orders. Inflows of new work fell for the fourth consecutive month in December, which weighed on production growth.

Data showed that four of the seven monitored ASEAN nations saw weaker manufacturing conditions. In the developed world, US manufacturing output decreased for the first time in four months, while Japan posted its seventh successive month of contraction, according to the global PMI survey report for December.

The euro area remained the main source of weakness. Global manufacturing saw new business intakes decline for the 18th month in a row, with reductions signalled across the consumer, intermediate and investment goods industries. International trade flows also deteriorated and the downturn in new export orders extended to 22 months in December.

Against this backdrop, India seems to be relatively better placed thanks to higher domestic exposure. Easing oil prices and robust systemic credit growth have aided India’s GDP growth lately, even as the rural economy has been weak . But subdued global demand could have repercussions for India’s business prospects.

“Looking ahead, external demand will likely remain weak in the near term as we expect economic growth in most advanced economies to undershoot consensus expectations this year," Thamashi De Silva, assistant India economist Capital Economics wrote in a note. That, and the slight softening of domestic demand, are reasons why growth in the manufacturing sector could slow down further in the coming months.

“But any deceleration in growth will be mild and India will remain an emerging market outperformer in 2024," she added. Meanwhile, Indian manufacturers saw a further uptick in purchasing costs with chemicals, paper and textiles becoming dearer. That said, input cost inflation in December was lower than historical levels.

Gaura Sen Gupta, economist at , cautioned that going into 2024, manufacturers may get less support from softening prices, which could hurt the industry's profits. “Listed company profits have been strong in 2023, supported by reducing input cost pressures, which has countered the slowdown in nominal sales growth.

In 2024, the support from input cost reduction could be less as prices have already softened considerably in 2023," she said. For the fourth month in a row, the rate of charge inflation surpassed that of input prices as companies raised selling prices in December. If business momentum doesn't pick up pace, it could weigh on the sector’s pricing power, reducing the scope for sharp price increases.

However, as things stand, Indian manufacturing firms are upbeat on production in the year ahead. Anecdotal evidence highlighted advertising, better customer relations and new enquiries as the main factors boosting business confidence in December, said the survey report..