India's Economy Faces Fresh Headwinds. Manufacturing Is One Bright Spot

India's manufacturing sector continues to support economic growth despite signs of slowing momentum, aided by stronger exports and inventory build-up, according to HSBC.

However, the report cautions that a weak monsoon, a possible strong El Niño and softening rural demand could pose fresh challenges to the economy in the months ahead.

Source : Freepik

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Key points generated by AI, verified by newsroom

• Manufacturing sector proved resilient, curbing broader economic slowdown.
• Exports, inventory build-up bolstered manufacturing; El Niño risks agriculture.
• Falling oil prices, easier finance aid services; rural demand struggles.

The manufacturing sector has helped curb a broader slowdown in economic momentum even as indicators weakened in April‑May, a report said on Tuesday.

Manufacturing makes up nearly 20 per cent of GDP and has been remarkably resilient, led by exports and inventory build-up, the report from HSBC Global Investment Research said.

This is because energy-market uncertainty prompted precautionary inventory build-up – a trend most visible in consumer goods. Meanwhile, lower US tariffs created a window to accelerate non-oil exports ahead of potential Section 301 tariffs.

However, the report said its database of 100 growth indicators points to weakening momentum in April‑May, along with chances of very strong El Niño and weak monsoon pose risks to agriculture and rural demand.

The bank noted that lower US tariffs created a window to accelerate non‑oil exports ahead of potential Section 301 measures, supporting factory activity.

However, the report highlighted two positive drivers for growth outside agriculture, particularly in services comprising 55 per cent of GDP.

A pullback in oil prices toward pre‑war levels should help lift the trade and transport sector, which accounts for about 15 per cent of GDP and easier financial conditions, on the back of the FX package, could help lubricate the financial sector, which makes up roughly 25 per cent of GDP.

Even before the package-induced capital inflows started in earnest, yields across a variety of instruments have been falling, the report noted.

By contrast, agriculture, which makes up nearly 20 per cent of GDP, faces headwinds as temperatures are trending above normal, rainfall is about 30 per cent below normal and reservoir levels stay below last year's.

"Rural demand is already showing early signs of strain. Youth unemployment has risen more quickly in rural areas compared to urban areas. Two-wheeler sales and growth in rural bank balances have slowed and domestic GST collections softened in June," the report noted.

(This report has been published as part of the auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)