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| Photo Credit: Reuters

India’s factory activity levels dropped to a three-month low in May, with output levels easing due to the heat wave that led a reduction in working hours amid intensive heat and a rise in production costs that flared up to a level only experienced once over the previous 21 months, as per the HSBC India Manufacturing Purchasing Managers’ Index (PMI).

The seasonally adjusted index, that reflects an uptick in activity levels when its score is over 50, declined from 58.8 in April to 57.5 in May.

Also read | Industrial output slows to 4.9% in March

Fresh orders for factories moderated to the lowest level since February, with election-related disruptions and competition affecting domestic demand sources, even as export orders grew at the fastest pace in over 13 years, as per the findings of the survey-based PMI. Despite the moderation, new orders and output rose at a substantial pace, the index statement noted.

While input costs and output charges headed north, producers expressed the highest level of positive sentiment towards growth prospects in nearly nine-and-a-half years, partly based on expectations that economic and demand conditions will remain favourable. This optimism triggered a nearly 19-year high for job creation in factories surveyed by S&P Global for compiling the PMI.

“Ongoing strong sales performances combined with upbeat growth forecasts fuelled job creation in May. Manufacturing employment rose to one of the greatest extents seen since data collection started in March 2005,” the statement said.

Jobs growth, parallel to rising material and freight costs, underpinned a quicker increase in input costs at goods producers. The overall rate of inflation remained below its long-run average, but picked up to its joint-highest since August 2022,” the PMI release stated.

Reacting to the rise in operating expenses, firms raised own selling prices in May at a pace that was the fastest in eight months. However, this price hike only constituted part of the surge in production costs leading to a squeeze in margins for manufacturers, HSBC’s global economist Maitreyi Das pointed out.

“The manufacturing sector remained in expansionary territory in May, albeit the pace of expansion slowed, led by a softer rise in new orders and output. Panellists cited heatwaves as a reason for lower work hours in May, which may have affected production volumes,” Ms. Das said.