Even As China Stumbles, Indian Economy Shows No Signs Of A Slow Down

India’s manufacturing and services sector activity continued to expand at a robust pace in August 2022, as per the latest Purchasing Managers’ Index (PMI) data. The manufacturing PMI rose to 58.6 in August from 57.7 in July, while the services PMI moderated slightly to 60.1 from 62.3 in the previous month. Nevertheless, the strong PMI prints demonstrate the underlying strength of the Indian economy even as global growth slows.

Manufacturing PMI Expands for 14 Straight Months

The IHS Markit India Manufacturing PMI index has now remained above the 50-mark for 14 consecutive months, indicating a steady expansion in factory activity. The August manufacturing PMI reading of 58.6 was the highest since December 2021 and above its long-run average of 53.9.

A PMI reading above 50 denotes expansion in business activity over the previous month, while a sub-50 print signals contraction. The robust August data underscores that demand conditions remain conducive for the manufacturing sector despite global turbulence.

New orders and output continued to rise at a sharp pace in August, reflecting solid domestic consumption appetite. New export orders also expanded at the fastest rate since January 2021, signalling an improvement in external demand.

While input cost inflation picked up to a 12-month high in August, manufacturers were able to pass on higher costs to consumers as output prices rose at a slower pace. This implies firms have some pricing power to protect profit margins currently.

However, supply-side constraints persisted with vendors’ delivery time lengthening further. Manufacturers also drew down inventories to complete sales as outstanding business remained elevated.

On the employment front, job creation moderated slightly in August but remained well above the survey average. Businesses expect output growth in the coming 12 months amid predictions of better demand.

Services PMI Dips but Remains Strong

The IHS Markit Services PMI declined from 62.3 in July to 60.1 in August but held firmly above the crucial 50-mark. The August figure also compared favorably to the survey average of 54.7.

New business inflows expanded at a marked rate as domestic demand conditions stayed positive. New export orders also increased at the fastest rate in over 14 years, mirroring the trend noticed for goods producers.

August data indicated pressure on operating capacities due to rising sales. Outstanding business volumes expanded further, but employment creation eased to a six-month low. Input cost inflation ticked higher but remained below its long-run average.

Companies foresee output to increase over the course of next 12 months, supported by marketing initiatives, projects in pipeline and hopes of better demand.

Key Takeaways

The August PMI figures reinforce that the Indian economy continues to outperform global peers. Growth prospects remain supported by solid domestic consumption, increased investment in capacity expansion and higher exports.

However, the shallowing rate of job creation and supply shortages are areas of concern. Cooling input cost pressures come as a relief, but manufacturers may find it challenging to sustain pricing power if demand slows.

Overall, India’s growth momentum remains promising compared to developed nations and many emerging economies. But the country cannot remain completely decoupled from global headwinds.

If the external environment worsens or the rupee weakens sharply, factory production and services activity could start moderating in coming months. The RBI may feel the need to pause its rate hiking cycle by year-end if global forces turn more adverse.

For now, the August PMI figures confirm the resilience of the Indian economy. But policymakers need to be watchful of risks to growth from extended monetary tightening, China’s slowdown and recession worries in the West.