Manufacturing PMI: Q4 is a litmus test, but no fireworks so far

The seasonally adjusted HSBC India Manufacturing PMI slipped to a 14-month low of 56.3 in February from 57.7 in January. The fall was driven by softer new orders and production growth. A reading above 50 indicates expansion.

While the headline PMI stays in the expansion zone, it is hardly a comfort as cost pressures still linger. Indian manufacturers faced another rise in input costs, with frequent reports of greater bamboo, leather, marketing, rubber and telecom prices, said the PMI survey report.

Subdued demand

Lately, manufacturers have been raising selling prices to protect margins. In February, too, firms passed on higher labour costs to clients. A concern here is that elevated product prices could hamper demand. The survey showed that Indian manufacturers have expressed strong optimism about growth prospects for the coming year, with client demand expected to remain positive and support output. Even so, the PMI’s gauge for business confidence—the Future Output Index has eased to 64.9 from 65.1 in the previous month.

But this optimism faces many hurdles. External headwinds from global trade policy uncertainty and commodity price volatility tend to have repercussions on corporates and India’s macroeconomic position.

The NSO data released on Friday showed that India’s GDP grew 6.2% in Q3FY25, a tad above expectations. However, manufacturing growth was sluggish, weighed down by weak corporate profitability, with the services sector showing resilience. FY25 GDP growth rate was revised higher to 6.5% from 6.4% earlier.

“This (revised FY25 GDP growth rate) implies steep growth of 7.6% year-on-year in Q4FY25. We see downside risk with Q4FY25 GDP growth is expected to be closer to 6.8%,” said IDFC First Bank’s 28 February report.

High-frequency indicators in Q4FY24 are mixed, with the rise in rural consumption and central government capital expenditure, but urban demand remains relatively subdued, with a slowdown in electronic payments (UPI, credit and debit card usage) and a further slowdown in passenger vehicle growth, the IDFC report added.

RBI push

The likely positive impact on urban consumption buoyed by the recent cut in income taxes, pick-up in government capex, monetary, and regulatory easing by the Reserve Bank of India (RBI), which began in February, is expected to come, albeit with some lag. On the monetary policy front, wide-held expectations are that the RBI would opt for a 25-basis points repo rate cut in April as well, aided by moderating inflation pressures, which provides scope to spur growth.

But it is a tedious task. A subdued household savings rate due to muted income growth in the post-covid era points to demand pain. Plus, the wealth effects from strong equity markets have also started to reverse, given the sharp correction in benchmark indices over the past three to four months, said Radhika Rao, executive director and senior economist at DBS Bank.

Striking a similar note of caution, Nomura Global Markets Research said this cyclical growth slowdown still has legs. The proprietary Nomura India Composite Leading Index, which has a one-quarter lead on non-agricultural GDP growth, has been sequentially moderating since Q1 2024 and has been below the 100 threshold for three quarters now, which points to below-trend growth and an ongoing cyclical growth slowdown. The broking firm estimates FY25 GDP growth rate at 6.2%.