Hopes of factory growth rebound in Q3 on thin ice

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| Photo Credit: N. Bashkaran

Private sector industrial activity appears to be on a relatively weak wicket even in the third quarter of 2024-25, scotching hopes of a quick rebound from the sharp tumble in the July-September quarter when manufacturing growth slipped to a mere 2.2%, and GDP grew at a seven-quarter low pace of 5.4%.

Factory activity expansion in India’s private sector fell to a joint-11 month low in November, while firms raised prices at the swiftest pace in over 11 years as input cost pressures began to bite, as per the survey-based HSBC India Manufacturing Purchasing Managers’ Index (PMI). The index reading fell to 56.5 from 57.5 in October — a reading of over 50 indicates a rise in activity levels.

Output levels at surveyed factories grew at the slowest pace since December 2023. Incidentally, for the first time since August 2017, factories also reported an uptick in their stocks of finished goods, breaking a seven-odd year sequence of such piled-up stocks declining every month. This signals a mismatch of sorts between production levels and end-users’ demand through last month.

New business orders and production levels increased at a softer pace as favourable demand conditions clashed with fierce competition and price pressures. However, fresh export orders gained pace to surge at the highest pace in four months, spurring some optimism that goods exports may see yet another healthy uptick after October’s 28-month high growth of 17.25%.

Officials had attributed the revival in exports to improved demand from developed markets for the Christmas festivities this year. The 400-odd firms surveyed for the index reported gains in orders from Bangladesh, mainland China, Colombia, Iran, Italy, Japan and Nepal, apart from major markets such as the U.S. and U.K.

These companies also cited higher outlays on freight, labour and materials that they passed on to clients, as input cost inflation intensified to the highest level since July. Pricier chemicals, cotton, leather and rubber were named as important pressure points on the input cost front.

Producers continued to buy additional inputs to build inventories of raw materials, but the rise in such purchases was the weakest in just under a year, S&P Global, which conducts the PMI surveys, noted. Accumulated input stocks thus fell to the weakest level so far in 2024.

Incidentally, employment levels continued to be ramped up for the ninth successive month, albeit at a lower scale than October. Firms reported hiring staff on both permanent and temporary bases

“Business optimism was spurred by predictions that marketing efforts and new product releases will bear fruit. Recent capacity expansion efforts and forecasts of demand strength also underpinned upbeat forecasts for output in 2025,” the firm said.

While the PMI reading was down slightly in November, it was still firmly within expansionary territory, and the four-month peak in new export orders led the manufacturing sector’s growth in November, said Pranjul Bhandari, chief India economist at HSBC.

“The rate of output expansion is decelerating due to intensifying price pressures. Input prices for a variety of intermediate goods — including chemicals, cotton, leather, and rubber — rose in November, while output prices soared to an eleven-year high as rising input, labour, and transportation costs were passed on to consumers,” she reckoned.