The unexpected decline in the HSBC India Manufacturing Purchasing Manufacturer’s Index (PMI) for December has puzzled observers, especially given the robust growth indicated by other economic indicators. While acknowledging the PMI's signal of continued strength in the manufacturing sector, economists suggest that it may signify an anticipated moderation in economic activities during the fourth quarter of the fiscal year and into the next fiscal year, 2024-25.
In December, the HSBC India Manufacturing PMI dropped to an 18-month low of 54.9 from 56 in November. Although still reflective of a significantly improved manufacturing sector, this reading, while above the long-run series trend, contributed to the lowest quarterly average of 55.5 since Q1FY23.
The decline in manufacturing PMI can be attributed to various factors, including reduced output and diminished demand for specific products, alongside slower growth in export orders. In contrast, the HSBC India Services PMI increased to a three-month high of 59 in December from the one-year low of 56.9 in November, contributing to the lowest quarterly average since Q4FY23 due to lower readings in October and November.
HSBC's Pranjul Bhandari, Chief Economist for India and Indonesia, and Aayushi Chaudhary, Economist for India, Indonesia & Sri Lanka, highlighted that combining the Services PMI with the earlier-released Manufacturing PMI provides a composite picture of the economy. Overall, output, new orders, and future expectations increased, while the overall rise in input prices softened. However, output prices rose, leading to improved margins.
Suman Chowdhury, Chief Economist and Head of Research at Acuité Ratings & Research, noted that the PMI Composite improved to 58.5 in December 2023 from 57.4 in November 2023, primarily driven by a higher PMI services print. On a quarterly basis, the growth moderation is evident from the average PMI Composite, slipping to 58.1 in the third quarter from 61.3 in the second quarter and 60.9 in the first quarter.
Despite the first advance estimate of national income forecasting GDP growth at 7.3% for the fiscal year, concerns linger over potential downside risks. Analysts anticipate challenges from approaching elections that might impact capital expenditure growth and uncertainties related to farm sector output. Economic growth in the second half of the fiscal is expected to be around 7%, down from 7.7% in the first half.