India's manufacturing sector has helped cushion a broader deceleration in economic momentum even as key growth indicators weakened in April–May 2025, according to a report released on Tuesday, 7 July by HSBC Global Investment Research. The sector, which accounts for nearly 20 per cent of GDP, has shown remarkable resilience driven by export acceleration and precautionary inventory build-up.

What Is Driving Manufacturing Resilience

According to the HSBC report, energy-market uncertainty prompted businesses — particularly in consumer goods — to stock up inventories as a buffer against supply disruptions. Separately, lower US tariffs opened a window for Indian exporters to accelerate non-oil exports ahead of potential Section 301 measures, lending additional support to factory activity. The combination of these two forces has kept manufacturing output relatively buoyant even as broader momentum has softened.

Growth Indicators Signal Weakening Momentum

HSBC's database of 100 growth indicators points to easing momentum in the April–May period. The report also flagged the elevated probability of a strong El Niño event and a weak monsoon as material risks to agriculture and rural demand. Temperatures are reportedly trending above normal, rainfall is running approximately 30 per cent below normal, and reservoir levels remain below last year's — a combination that raises concerns for the kharif crop season.

Two Bright Spots Outside Agriculture

The report identified two positive drivers for growth beyond the farm sector. First, a pullback in oil prices toward pre-war levels is expected to lift the trade and transport sector, which contributes roughly 15 per cent of GDP. Second, easier financial conditions — supported by a foreign exchange package that has already begun pushing yields lower across instruments — could stimulate the financial sector, which makes up approximately 25 per cent of GDP. Notably, yield compression was visible even before package-induced capital inflows fully materialised.

Rural Demand Under Pressure

Agriculture, which represents close to 20 per cent of GDP, faces a more difficult outlook. The HSBC report noted that rural demand is already showing early signs of strain: youth unemployment has risen faster in rural areas than in urban ones, two-wheeler sales have slowed, growth in rural bank balances has moderated, and domestic GST collections softened in June. 'Rural demand is already showing early signs of strain,' the report stated, pointing to these indicators as a cluster of warning signals rather than isolated data points.

Outlook and Key Risks

India's services sector, which accounts for 55 per cent of GDP, remains the largest single pillar of growth and has so far been insulated from the agricultural and rural headwinds. The near-term trajectory of the economy will hinge on monsoon performance, the pace of capital inflows following the FX package, and whether the export window ahead of Section 301 tariffs remains open. With manufacturing providing a floor and services holding steady, the broader slowdown appears contained for now — though the agricultural outlook introduces meaningful downside risk into the second half of the year.