India's manufacturing Purchasing Managers' Index (PMI) climbed to 55.0 in May 2024, up from 54.7 in April and ahead of the flash estimate of 54.3, as output growth accelerated and new order intake strengthened, according to the HSBC Flash India Manufacturing PMI survey released on Monday, 1 June. The final reading marks the best improvement in sectoral health in three months.

Key Developments

The upward revision from the flash figure reflected faster expansion across buying activity, new orders, and production volumes compared with April. Stockpiling also gained momentum, with finished goods inventories rising at a quicker pace — a trend analysts have linked to precautionary inventory build-up amid unresolved geopolitical tensions in the Middle East.

Goods producers recorded the fastest expansions in new orders and output since February, driven primarily by the intermediate and capital goods categories. Consumer goods makers, by contrast, reported a slowdown, suggesting the current growth cycle is more investment- and infrastructure-led than consumption-driven.

What Economists Are Saying

Pranjul Bhandari, Chief India Economist at HSBC, noted that the data pointed to 'another month of possible precautionary stockpiling as the Middle East conflict remains unresolved.' She added that output growth accelerated while purchasing activity and stocks of finished goods rose at a faster pace.

Bhandari also flagged a potential margin squeeze: input cost inflation eased slightly on the month, but output price inflation slowed more sharply, compressing the gap between what manufacturers pay and what they charge.

Demand Drivers and Export Trends

Domestic demand remained the primary engine of new order growth, with survey participants citing demand strength, infrastructure projects, and new business wins as the main factors behind the upturn. Export order growth, while still solid, moderated compared with the previous month.

International sales nonetheless expanded, with exporters reporting gains from markets across Asia, Europe, Kenya, Nigeria, and the Middle East, according to the survey data.

Cost Pressures and Price Dynamics

On the cost front, the ongoing Middle East conflict continued to weigh on input prices. Panel members reported higher outlays on energy, fuel, raw materials, and transportation. Purchasing prices rose at the second-fastest pace since April 2022, exceeded only by the April 2024 reading. According to the survey, a stronger increase in input prices had been recorded only once in the preceding 45 months.

Despite elevated input costs, output charge inflation remained below its one-year average, pointing to manufacturers absorbing a portion of cost increases rather than passing them fully to buyers.

Outlook

With the PMI holding comfortably above the 50-point expansion threshold for a sustained period, India's manufacturing sector continues to be a relative bright spot in the global industrial landscape. However, the divergence between capital goods strength and consumer goods softness, combined with margin pressure from sticky input costs, will be closely watched in the months ahead.