Manufacturing | India stands out as an outlier worldwide on the positive side

Seen against the backdrop of the weak global economy, India is clearly holding its own

Ever so often a data release gives an unexpected number making headlines and calling for deeper analysis. The latest to do so is the HSBC India Manufacturing Purchasing Managers’ Index (PMI) compiled by S&P Global which made a splash by falling to an 18-month low in December. At 54.9, this level was still above the long-term trend but this plunge raised a red flag. And rightly so.

In the first nine months of Financial Year 2023-2024, the Manufacturing PMI for India has fallen five times. In other words, as per responses from the survey of managers of 400 large firms, while manufacturing output has remained in the zone of expansion compared to the previous month, performance has been worse than the previous month five times out of nine.

Yet, India stands out as an outlier worldwide on the positive side — of the 13 large economies for which data are available, only three (India, Russia, and China) recorded growth in manufacturing in December. In fact, the Global Manufacturing PMI was in the zone of contraction i.e. less than 50 for the seventh consecutive month in December.

Factory output has risen in only four of the past 17 months, as inflation and higher interest rates globally have stemmed demand. In fact, the global PMI surveys have shown that new orders for goods have fallen continuously over the past one-and-a-half years, and new orders continued to fall at a faster rate than output during December. The situation for manufacturing globally, therefore, has been rather bleak.

Seen against the backdrop of the weak global economy, India, clearly, has been holding its own. The First Advance Estimate of national income for 2023-2024 has come through from the Central Statistical Organisation pegging growth in manufacturing at 6.5 per cent in constant prices. Going ahead, the United Nations has called out India to be the fastest growing economy in the world in its latest report, World Economic Situation and Prospects 2024, particularly due to the strong manufacturing and services sector.

While many countries will be impacted this year by low global demand, India’s domestic demand is expected to be robust enough to hold the economy up. The report points to the high investment interest from multinationals, which are looking to India as an alternative manufacturing base to diversify their supply chains as well as heavy investment from the government in infrastructure and connectivity, which has improved the overall investment climate in the country.

Will the optimism regarding investment materialise in 2024? There are significant government measures that have improved the investment climate. For instance, the Production-Linked Incentive (PLI) scheme for 14 sectors, which has attracted over Rs 950 billion crore in investment till September and 746 applications have been approved till November. But if we look at overall investment numbers using data from the Centre for Monitoring Indian Economy (CMIE) for the past year, we get mixed signals — Rs 2.1 trillion worth of new projects were announced in the October-December quarter, which was higher by almost 15 per cent from the preceding quarter, and yet significantly weaker than last year’s Rs 9.5 trillion. Yet, the data from the latest quarter marked a turnaround, as capex proposals for the preceding two quarters went through a sharp fall. Now, it remains to be seen whether the turnaround is sustained and picks up over the year ahead.

What about smaller firms that form the bulk of India’s manufacturing sector? Here we see a steady but slow expansion over the past year, as reported by Jocata-Sumpoorn, an index launched recently in association with SIDBI, which tracks sales performance of small firms. Since April, the index has shown mild to moderate expansion in sales, compared to higher pace of expansion the previous year.

As the MSME sector contributes to around 45 per cent of India's exports, the global slowdown has impacted this sector. Rural consumption has also been hit in 2023 with a poor monsoon, and this has hurt sales for smaller firms. With global warming, uncertainty in weather patterns has emerged as a new risk. The Reserve Bank of India (RBI) recently amended guidelines allowing informal enterprises with Udyam Assist registration to be eligible for priority sector lending, and this measure will give some support to this segment.

Interestingly, despite the plunge in the Manufacturing PMI in December, when it came to the outlook for the year ahead, the same respondents reported the highest optimism in three months! So, given a sustained pickup in investment, 2024 might well be the year for Indian manufacturing.

(Sumita Kale is CEO and Senior Fellow, Indicus Foundation. Views are personal.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.