India’s manufacturing growth hits three-month high in May as demand remains strong – Firstpost

India’s manufacturing sector gathered momentum in May, with factories reporting stronger orders and higher production despite mounting concerns over fuel costs and geopolitical tensions. The latest survey data suggests domestic demand continues to shield the economy from global headwinds, even as businesses grapple with rising input prices.

The HSBC India Manufacturing Purchasing Managers’ Index (PMI) rose to 55.0 in May from 54.7 in April, marking the strongest pace of expansion in three months and comfortably exceeding the preliminary estimate of 54.3. The reading signalled a sustained improvement in factory activity, driven by robust demand and increased output.

The survey offers fresh evidence of the economy’s resilience at a time when policymakers are monitoring the potential fallout from higher energy prices and supply-chain disruptions linked to the conflict in West Asia. While manufacturers benefited from stronger order books, rising costs emerged as a growing challenge during the month.

Demand remains the key growth driver

New business expanded at the fastest pace since February, supported by healthy domestic demand, infrastructure-related projects and competitive pricing. Companies reported a broad-based improvement in sales, helping offset signs of softer growth in export markets.

Although overseas orders continued to increase, the pace of growth slowed to a three-month low, suggesting global demand remains uneven. Domestic orders, however, remained strong enough to keep overall manufacturing activity on an upward trajectory.

The improvement in demand translated into higher production levels, with factory output rising at the quickest pace in three months. Growth was led by intermediate and capital goods manufacturers, while consumer goods producers recorded a more moderate expansion.

Manufacturers also stepped up purchasing activity, recording the fastest increase in input buying since February. Some firms said they were building precautionary inventories to guard against potential supply disruptions and further increases in costs.

Employment continued to rise during the month, although the pace of hiring eased from April.

Rising costs emerge as a challenge

Despite healthy demand, manufacturers faced intensifying cost pressures.

Input price inflation remained elevated and, excluding April’s reading, was among the strongest recorded in nearly four years. Companies reported higher spending on fuel, energy, transportation and raw materials, while capital goods producers experienced the steepest increase in input costs among the sectors surveyed.

Several firms attributed the rise in expenses to higher energy prices and supply disruptions stemming from the conflict in West Asia, which has raised concerns about freight costs and global supply chains.

The survey’s findings come amid growing concerns over inflation. In its monthly economic review released on Saturday, the finance ministry warned that rising fuel prices and energy supply disruptions linked to the West Asia conflict could push up retail inflation in the months ahead.

The ministry said higher upstream costs were likely to gradually pass through to consumers via transportation, energy and food prices.

Firms absorb part of the cost burden

Although input costs rose sharply, manufacturers were unable to fully pass on the increases to customers.

Selling price inflation eased from April and remained below the pace of input cost growth as competitive pressures limited companies’ ability to raise prices aggressively. As a result, many firms absorbed a portion of the higher costs, potentially squeezing profit margins.

The trend suggests that if cost pressures persist, manufacturers could face increasing pressure on profitability in the coming quarters.

Business confidence softens

Business optimism weakened in May, falling to its lowest level since February, though overall sentiment remained positive.

Manufacturers expressed confidence that demand conditions would remain supportive and that cost pressures could ease over time. Strong order books and ongoing marketing efforts were cited as factors underpinning future growth expectations.

However, the decline in confidence reflects growing caution among businesses as they navigate rising costs, geopolitical uncertainty and weather-related risks.

The finance ministry has also flagged concerns about weaker-than-normal monsoon rainfall, warning that a significant rainfall deficit could stoke food inflation, dampen rural demand and weigh on economic growth.

India’s retail inflation edged up to 3.48 per cent in April but remains below the Reserve Bank of India’s target, giving policymakers some room to support growth if external risks intensify.