Explained: Impact of India’s surging factory growth
In August, India’s factory growth accelerated at its fastest pace in three months, driven by strong growth in new orders and output, according to a private survey. However, the same survey also indicated that job creation had reached a four-month low. While remaining positive for the fifth straight month, it slowed to the lowest level since April.
IBT conducted an analysis to uncover the driving factors behind this surge in factory activities and assess its impact on India’s economy.
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Recent economic indicators for India in the first half of 2023 continue to signal an expansionary economy driven by domestic demand. Steel production grew by 11.9% year-on-year (YoY) in the April-June quarter, with steel consumption rising by 10.2% YoY. Commercial vehicle sales surged by 34.3% YoY in FY 2022-23, while private vehicle sales increased by 18.7% YoY during the same period.
This positive development is good news for Asia’s third-largest economy, which recorded a 7.8% growth rate in April-June, slightly exceeding Reuters’ forecast of 7.7%. This growth was primarily fueled by robust demand and positioned India as a bright spot in the global economy.
The index of industrial production, which can be volatile on a monthly basis, showed a 4.5% YoY growth in the April-June quarter, with manufacturing output up by 4.7% YoY in the same period. For the entire FY 2022-23, industrial production grew by 5.2% YoY, while manufacturing output increased by 4.7% YoY.
In FY 2022-23, capital goods production rose by 12.9% YoY, and infrastructure and construction goods production increased by 12.5% YoY. However, the production of consumer durables and nondurables was sluggish, with consumer durables growing marginally by 0.6% YoY, and consumer non-durables growing by 0.5% YoY, according to the National Statistical Office.
In the April-June quarter of 2023, capital goods production increased by 4.9% YoY, while infrastructure and construction goods production surged by 14.0% YoY. Consumer durables output remained weak, contracting by 2.8% YoY, but consumer non-durables showed strong momentum, rising by 6.7% YoY.
Factors contributing to the surge in factory activities
In August, factory activities in India experienced a significant growth spurt, and several factors contributed to this positive trend:
India’s factory growth was driven by robust growth in new orders and output. This surge in demand contributed significantly to the expansion of manufacturing activities. The Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P Global, saw a significant jump to 58.6 in August from 57.7 in July, marking its highest point since May. This exceeded expectations, as a Reuters poll had predicted a drop to 57.5.
Furthermore, output increased for the 26th consecutive month, reaching its highest level in nearly three years. Export sales also expanded at the fastest rate in nine months, driven by robust demand from countries such as China and the United States. Buying levels experienced a sharp rise, achieving the fastest growth in over 12 years. Meanwhile, employment saw the smallest increase in four months but remained above the series trend.
Additionally, buying levels rose sharply, marking one of the fastest rates in over 12 years, and delivery times were shortened for the sixth consecutive month. On the pricing front, input costs rose the most in a year, while factory gate charges increased at the slowest pace in four months. Finally, sentiment remained historically elevated despite optimism levels slipping to a three-month low due to inflation concerns.
This sustained expansion marked 26 consecutive months above the 50-mark, indicating growth rather than contraction—a streak not seen since March 2020, when pandemic-induced lockdowns were imposed.
Pollyanna De Lima, economics associate director at S&P Global said, “The PMI results for India painted a vibrant picture of the nation’s manufacturing landscape in August. Robust and accelerated increases in new orders and production suggest… strong contribution to second quarter (fiscal) economic growth.”
What are the effects of the factory activity surge on India’s economy?
The surge in factory activity during August holds significant implications for the Indian economy. Firstly, it has the potential to contribute significantly to economic growth by indicating increased production levels, which, in turn, can lead to higher GDP figures.
However, there is a notable slowdown in hiring despite the rise in factory activity, while remaining positive for the fifth straight month, slowed to the lowest level since April. which could impact employment levels. Policymakers may need to address this issue to ensure that economic growth translates into job opportunities for the workforce.
Another aspect to consider is inflation. The increased demand for goods and services associated with rising factory activity can lead to inflationary pressures. India’s annual retail inflation rose to a 15-month high in July and was expected to stay above the Reserve Bank of India’s target range of 2%-6% at least until October, a Reuters poll showed. This can affect consumers’ purchasing power, making it crucial to manage inflation effectively to maintain economic stability.
De Lima added, “The presence of stronger cost inflationary pressures serves as a reminder of the challenges inherent in managing growth … the need to maintain competitiveness helped restrict charge inflation.”
On the positive side, increased manufacturing activity often leads to higher exports, which can positively impact the country’s trade balance by generating more export revenue. However, the success of exports also depends on global demand and market conditions.
Companies are strategically focusing on a global orientation, evident through a sharp and rapid expansion in international sales. These export-centric tactics should help ensure that production continues to grow in the coming months.
In conclusion, India’s surge in factory activity during August is a promising sign for the nation’s economy. It not only hints at potential economic growth through increased production but also signifies a positive contribution to GDP figures. However, the slowdown in hiring, despite rising factory activity, calls for attention from policymakers to ensure job opportunities align with economic growth.
Inflationary pressures are another consideration, with the heightened demand for goods and services potentially affecting consumers’ purchasing power. Effective management of inflation becomes crucial for long-term economic stability. On a brighter note, increased manufacturing activity often leads to higher exports, which can improve the country’s trade balance and generate additional export revenue.
Companies’ strategic focus on expanding international sales reflects a global orientation, providing optimism for continued production growth in the coming months. Overall, this activity surge carries both opportunities and challenges, underscoring the need for a balanced and well-managed approach to sustain economic momentum.