India’s economic activity is solid but hurdles galore

The composite index is a weighted average of manufacturing and services business activity index. A reading above 50 indicates expansion.

The manufacturing PMI stood at 59.1 in April, the same as in March, while the services PMI rose to 61.7 from 61.2 in March. Survey participants attributed this expansion to buoyant demand from both domestic and external clients. 

The composite new export orders index rose at the fastest pace since the series started in September 2014. Coming on the back of global economic weakness and sticky inflation, this, possibly, means Indian businesses were able to provide more value for money to the global customers.

The manufacturing output index, a sub-index within manufacturing PMI, remained at 63.3 in April, almost the same as in March and up from 57.2 in January. Manufacturing activity is supported by better delivery time, possibly a result of reduced logistics bottlenecks. 

In fact, economists at the International Monetary Fund (IMF) recently lauded India’s emphasis on capital expenditure (capex) spending in building airports, roads, railroads and so on. Improvement in business activity has also resulted in more hiring and job creation with the manufacturing sector increasing its workforce at the highest rate in the last about one-and-half years.

From India’s perspective, manufacturing sector growth is more critical to provide employment opportunities to its vast population and wean people away from low-productivity agriculture. The much talked about ‘demographic dividend’ hasn’t paid yet. 

Nonetheless, the continued strong readings in April, despite the uncertainties in West Asia and volatile crude oil prices, reflect India’s resilience. Although India is not completely immune to downside risks, its growth prospects seem relatively bright. For instance, the IMF has raised India’s FY25 gross domestic product (GDP) growth projection to 6.8% from 6.5% in January. 

That said, geopolitical uncertainties and their impact on inflation as well as potential disruption in trade can weigh on India’s growth momentum.

The PMI indicates higher prices being charged by the producers due to high demand. While this bodes well for margins of companies, it could be a sign of overheating and validates the Monetary Policy Committee’s decision to not cut rates yet. 

After all, a rate cut could further spur demand and trigger an inflationary spiral. More worryingly, despite continuous increase in new business, pressures on capacity remain mild, which means private sector capex revival remains elusive.

Moreover, crude oil prices have shown significant volatility. With India being a net oil importer elevated oil prices can impact growth, inflation and government finances if it decides to absorb part of the increase. While India has benefitted from the current geo-economic fragmentation, importing oil from Russia at $15-20 per barrel discount, as per IMF’s report, the fragmentation continues to remain an uncertainty and a huge risk.

What also makes the growth path challenging for India is export demand, which faces headwinds. After rising for six consecutive months, global research firm Nomura’s leading index of Asia ex-Japan’s aggregate exports, dipped to 97.9 in May. This reading is consistent with low double-digit Asian export growth in Q2. The index is made up of nine forward-looking components and has a three-month lead time.

Despite India’s comparatively stable macros, economists at Nomura Singapore Ltd caution that India’s GDP growth could moderate to 6.6% in FY25 from a likely 7.8% in FY24 due to global risks, including a protracted global slowdown, geopolitical tensions, tighter global financial conditions and high commodity prices. 

“On the domestic side, India’s key challenge will be to ensure that the growth recovery generates jobs and is inclusive; providing adequate skills; factor market reforms; and ensuring the private capex cycle meaningfully inflects higher,” added the report.