PMI: Consumption fatigue hits manufacturers

A key highlight of the November PMI survey was that Indian goods producers increased their selling prices to the greatest extent since October 2013. This may have helped their operating margins, but pricing pressures along with fierce competition hindered demand for goods, dragging the headline index lower. The rate of new order intakes in November was the second-weakest in 11 months.

PMI survey participants attributed price hikes to increased freight, labour and materials costs. Input cost inflation intensified midway through the third fiscal quarter, reaching its highest mark since July, but remained below its long-run average, said the survey report. Items such as chemicals, cotton, leather and rubber became dearer.

The November manufacturing PMI reading comes on the heels of a shocker September quarter (Q2FY25) gross domestic product (GDP) data released last week. At 5.4%, India’s year-on-year GDP growth significantly missed consensus estimates of 6.5%, thus hitting a seven-quarter low. The fall was led by the manufacturing sector even as the services sector held up. India Inc’s Q2FY25 results also mirrored this pain, with corporates pointing out stress in urban consumption due to weak real incomes and rural demand yet to recover.

Muted expectations

In Q3FY25, the festive and wedding seasons are expected to do a heavy lifting on the demand front, but investors would do well to keep their expectations low. Elara Securities (India) checks for the festive season indicate that the demand was not broad-based, and only certain pockets of consumption fared well. “As such, we do not anticipate a significant turnaround in demand even in Q3FY25,” said the 29 November Elara report.

Government capital expenditure, which was muted in H1FY25, is expected to pick up pace in H2FY25, aiding the sluggish economy to regain pace. Further, with growth slowing, monetary policy measures may be used to propel demand. Against this backdrop, the Reserve Bank of India’s (RBI) interest rate decision this week is crucial. After the disappointing Q2 GDP data, the odds of an earlier-than-expected interest rate cut are rising. Also, measures to boost the banking sector’s liquidity may be in the offing.

However, note that retail inflation in October hit a 14-month high at 6.21%, above the RBI’s comfort zone. So, everyone will be watching if the RBI prioritizes growth over inflation.

For now, GDP growth expectations for FY25 have been lowered. The Q2 manufacturing weakness is unlikely to reverse fully in H2FY25 amid increased global uncertainty, said a Standard Chartered Global Research report on 29 November.

On the other hand, services-sector growth should also hold its ground as better consumption demand amid a rural recovery boosts domestic trade, and as government spending supports purchasing power, added the report.

Several state governments have rolled out income transfer schemes, which are likely to be reflected in Q3FY25 economic activity. Still, Standard Chartered Global Research has lowered India’s FY25 GDP growth forecast to 6.2% from 6.9% on weak Q2 GDP.

Meanwhile, optimism regarding future business prospects among PMI survey participants increased in November. Manufacturers are hoping that marketing efforts and new product releases will bear fruit. Going ahead, the recent capacity expansion efforts and forecasts of demand strength also underpinned upbeat forecasts for output in 2025, said the PMI report. But as things stand, near-term lingering risks can hurt manufacturers’ confidence.