Indian Manufacturing Sector Maintains Growth Momentum, Outperforming Global Trends

India's manufacturing sector exhibited robust growth in July, defying the global trend of sluggishness, as demand remained strong. According to the seasonally adjusted S&P Global India Manufacturing Purchasing Managers' Index (PMI), the sector scored an impressive 57.7 in July, slightly below June's reading of 57.8. Despite the marginal dip, both output and new orders expanded at encouraging rates, prompting businesses to increase employment and purchasing activities. Furthermore, the sector experienced relatively muted cost inflationary pressures, signalling a favourable economic climate.

Steady Growth in the Manufacturing Sector

The PMI index indicates a continuous improvement in the health of the manufacturing sector, with business conditions strengthening for the past 25 months. The July survey highlighted widespread reports of demand improvements, leading to a substantial expansion in new orders. This increase was in line with the previous survey period, showcasing the sector's resilience and growth trajectory.

Employment Expansion and Export Surge

Andrew Harker, Economics Director at S&P Global Market Intelligence, expressed optimism about the sector's performance. He stated that the Indian manufacturing sector showed no signs of losing growth momentum in July, as production continued to surge due to strong new order growth. The increased pressure on capacity prompted firms to solidify employment expansion, a trend expected to continue if demand remains robust. India's manufacturing sector has emerged as a star performer globally, defying demand weakness in other parts of the world.

The manufacturing sector witnessed a notable surge in new export business, reaching its fastest pace since November of the previous year. Respondents attributed this growth to increased new orders from countries such as the US, Bangladesh, and Nepal. In response to the surge in new orders, manufacturers ramped up production, resulting in continuous monthly output growth since July 2021.

Employment and Inventory Management

The sector's increased workload led businesses to hire additional staff, maintaining a solid pace of job creation in line with the previous months. However, despite the expansion in capacity, backlogs of work continued to increase due to the strength of the rise in new orders, marking the nineteenth consecutive month of growth, albeit slightly.

Efforts to meet rising demand compelled firms to utilize their inventory holdings, which decreased throughout the past six years, although the latest fall was only slight. Furthermore, purchasing activity remained robust, signalling optimism among businesses, and the growth in stocks of purchases aligned with the buoyant demand environment.

Challenges and Mitigations

Manufacturers benefited from faster deliveries from suppliers, with lead times shortening for the fifth consecutive month, albeit marginally. However, input cost inflation accelerated to a nine-month high in July, primarily driven by higher costs of raw materials, particularly cotton. Rising labour costs also contributed to increased selling prices, though the rate of inflation eased to a three-month low.

Despite these challenges, firms anticipated sustained high demand over the coming year, supporting projections for production growth. Some businesses reported positive responses from customers regarding recent new order deliveries and expected further commitments in the coming months. While confidence was slightly lower than in June, it remained above the series average, with 32% of respondents predicting a rise in output and only 2% expressing pessimism.

The Indian manufacturing sector demonstrated remarkable resilience and sustained growth in July, bucking the global trend of weakening demand. The sector's ability to expand employment and increase production in response to robust new order growth signals a promising future for the industry. While challenges such as inflationary pressures persist, businesses remain confident about the coming year's prospects, indicating a positive outlook for India's manufacturing sector.