India's manufacturing conditions improve as output growth hits 13-month high

Upturn in sector was supported by resilience of demand and strong sales growth

A mobile phone factory in India. The country's manufacturing sector registered a robust improvement in December. Bloomberg

Business activity in India's manufacturing industry improved last month on stronger increases in factory orders and production in the world's fifth-biggest economy.

The seasonally adjusted S&P Global purchasing managers’ index reading climbed to 57.8 in December, from 55.7 in November, remaining well above the neutral 50 mark that separates growth from contraction.

The December manufacturing PMI pointed to a robust improvement in the health of the sector, the best since October 2020.

The 56.3 PMI average for the third fiscal quarter was the highest recorded since a year ago. Demand resilience boosted sales growth in December, the fastest rate increase since February 2021, according to the survey.

“Following a promising start to 2022, the Indian manufacturing industry maintained a strong performance as time progressed, wrapping the year with the best expansion in production seen since November 2021,” said Pollyanna de Lima, economics associate director at S&P Global Market Intelligence.

“Demand strength took centre-stage among the reasons provided by firms for improvements in many measures.”

Despite global economic uncertainty, slowing growth and higher inflation around the world, overall demand in the Indian economy remained conducive to growth and manufacturers scaled up production at the end of 2022.

The upturn in December output was sharp and the best recorded since November 2021. Data pointed to a further increase in buying levels among manufacturers, which was supported by an improvement in demand strength.

India’s real gross domestic product grew by 8.7 per cent in the 2021-2022 fiscal year, boosting its total output above pre-coronavirus levels despite global macroeconomic headwinds, the International Monetary Fund said last month.

The country, Asia's third-largest economy after China and Japan, rebounded from the deep coronavirus-induced downturn on the back of fiscal measures to address high prices and monetary policy tightening to address elevated inflation, the fund said.

Hiring activity picked up further in December on the acquisition of more inputs, according to the PMI survey.

“Additional materials were purchased and extra workers hired as companies sought to supplement production and maintain healthy levels of inventories. Input stocks rose at a near-record pace,” said Ms de Lima.

Input prices surged during the month but this was largely contained as a result of a solid and quicker increase in selling prices, the report said.

While overall demand in the economy was supported by healthy inflows of new business, manufacturers said advertising, product diversification and favourable economic conditions supported sales.

The PMI data showed that international demand for Indian goods also improved but to a lesser extent than it did in November.

Overall, new orders from abroad rose at their slowest pace in five months as several companies reportedly struggled to secure new work from key export markets.

The easing of global supply chain constraints helped the Indian manufacturing sector to meet a sharp rise in input demand, with average lead times unchanged from November.

“Less challenging supply chain conditions also supported the upturn,” Ms de Lima said. “Delivery times were reportedly stable, which enabled firms to secure critical materials and boost their input stocks.”

This was the 10th consecutive month that employment rose, although at its slowest pace since September.

The PMI report showed overall cost pressures remained relatively muted in December, with the overall rate of inflation little-changed from November and the second-slowest since September 2020.

For the first time in about two and a half years, the rate of inflation for selling prices outpaced that of input costs.

Overall business confidence among manufacturers continued to improve in December, with many reporting healthy inflows of new business.

“While some may question the resilience of the Indian manufacturing industry in 2023 amid a deteriorating outlook for the global economy, manufacturers were strongly confident in their ability to lift production from present levels,” said Ms de Lima.