Manufacturing momentum slows in India

May brought signs of a slowdown in a manufacturing sector that has often been viewed as one of the pillars of India’s economic resurgence. The HSBC India Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, declined from 58.2 in April to a three-month low of 57.6 in May. Although there’s a sudden lull in momentum, the sector still retains its core strength—particularly in employment, which has seen the highest-ever level of job creation.

This is a significant moment for the Indian economy. It stands at a crossroads—a slight slowdown in manufacturing growth exists alongside record-high hiring, stubborn inflationary pressures, and an economic expansion that continues to outpace global peers.

Cooling momentum, not another collapse

The PMI data needs to be put in perspective. While any reading above 50 indicates expansion, May’s figure of 57.6—though lower than April—still suggests robust growth. The slowdown in new orders and output appears to be more a case of moderation than cause for alarm. Geopolitical tensions and rising costs have undoubtedly dampened demand, but resilient domestic consumption and international sales continue to support growth.

This cyclical easing, following months of strong performance, is arguably natural. The critical question is whether it signals a broader reversal or merely a temporary slowdown. The data, so far, suggests the latter.

Hiring hits record high: A positive signal

What truly stands out in the May report is the surge in fresh employment. Job creation hit record levels for the first time since the PMI survey began. Even more notably, the new positions are permanent rather than temporary, volume-based hiring.

This reflects the optimistic outlook manufacturers hold—not just for short-term demand, but for long-term growth. Companies typically do not commit to full-time hiring unless they foresee sustained business prospects. In India, where employment is often the Achilles’ heel of economic development, this trend must be acknowledged and applauded.

If maintained, this uptick in employment could foster a broader increase in incomes, especially in rural and semi-urban areas, feeding into consumption and reinforcing the demand engine that is central to India’s GDP growth.

While inflating risks the outlook

Input price inflation rose to a six-month high in May, with manufacturers passing on the increased costs to consumers. Output price inflation is now nearing its highest levels in a decade.

This is where the economic outlook becomes complex for the Reserve Bank of India (RBI). The central bank has already cut its key repo rate by 50 basis points this year, buoyed in part by the trend of headline inflation staying under the 4% target. However, with cost pressures rising and manufacturers hiking prices, the RBI faces a policy dilemma.

Should it continue with the anticipated rate cuts—one expected on June 6 and another in August—to support growth, or pause to avoid rekindling inflation? It’s a delicate balance, and any miscalculation could either dampen economic momentum or jeopardies inflation control.

Global context: India still shines

India’s economic narrative remains robust. The economy grew at 7.4% year-on-year in the last quarter—the fastest pace since early 2024 and well above market expectations. In contrast to global peers grappling with stagnation and weak demand, India continues to grow, powered by manufacturing, services, and consumption.

This resilience explains why foreign investors and multinational firms increasingly view India as the next major growth story. While the manufacturing PMI may have decelerated slightly, the larger story is of a dynamic, job-creating economy with a relatively stable macroeconomic environment.

Conclusion

May’s PMI data is a reminder that economic cycles are rarely linear. Manufacturing is cooling, though not alarmingly. Hiring trends are stronger than ever. Inflation is ticking up, but only modestly. GDP growth remains enviable. Together, these indicators point to a resilient economy, albeit one that must navigate its challenges carefully.

The government and RBI must now proceed with caution. A mix of prudent monetary policy, targeted sectoral incentives, and sustained infrastructure investment will be key to ensuring that manufacturing remains a pillar of growth—unshaken by global shocks or domestic missteps. Indian manufacturing may be humming a different tune for now, but the march continues. The road ahead may demand agility, but it remains full of promise.