Amid the US tariff-led gloom, robust business momentum in India’s manufacturing sector, captured by the Purchasing Managers’ Index (PMI), can seem comforting.
The seasonally adjusted HSBC India Manufacturing PMI surged to a 17.5-year high of 59.3 in August from 59.1 in July, driven by rapid production growth. A figure above 50 signals expansion.
But market participants should not get complacent as this cheer is most likely to be short-lived.The adverse impact of the latest 50% tariff levied by the US on Indian goods is expected to be felt from September.
PMI’s New Export Orders index eased to a five-month low in August. Labour-intensive sectors such as textiles, gems and jewellery, household items and seafood would feel the heat as demand prospects dim if no bilateral agreement is reached. This may trickle through exports and have a domino effect on employment, wages, private consumption and, thereby, tarnish business confidence.
True, India is a more domestically driven economy, and this could offer some cushion from export jitters. Last week, the gross domestic product (GDP) data for the June quarter (Q1FY26) threw a surprise, showing a massive 7.8% year-on-year growth. But the surge was driven by statistical factors and one-offs such as front-loaded government spending and front-loaded exports to the US due to tariff threat. Since some of these boosters would reverse ahead, the Q1 GDP reading doesn’t mean strong underlying domestic demand.
GST rejig hopes
Hopes of a consumption revival are pinned on the upcoming overhaul of the goods and services tax (GST) rate structure. Lower prices due to reduced tax are expected to boost demand, reviving sluggish consumption.
According to Emkay Global Financial Services, while FY26 may see some buffers from consumption due to the impending GST rationalisation, Q2FY26 (September quarter) is likely to be a washout for manufacturing (and consumption) as both producers and consumers delay manufacturing/purchases ahead of the GST rationalisation.
Meanwhile, input costs for Indian manufacturers continued to increase in August, with bearings, leather, minerals, steel and small electronic parts getting dearer, showed the PMI survey.
Conversely, selling charges rose at a higher pace, thanks to demand strength. Indian manufacturers spent on hiring and rebuilding stocks by purchasing additional raw materials and semi-finished items.
One factor that supported these positive spending trends was confidence among manufacturers that output would increase over the course of the coming 12 months, said the PMI report.
PMI’s Future Output Index, which is a gauge of business confidence, improved in August from July’s three-year low. Yet, the road ahead is rough.
“If 50% bilateral tariff persists till March 2026, the drag on FY26 GDP growth is estimated at 0.4%. The proposed GST cut, if implemented by October, is estimated to push up growth by 0.3% in FY26,” said IDFC First Bank report dated 29 August. So, on a net basis, the GST cut will only partly counter the negative impact of tariffs.
In this backdrop, the Reserve Bank of India’s interest rate decisions would be crucial. “Even as headline GDP growth suggests economic resilience, the forward growth trajectory is pointing lower, and sustained disinflation below the RBI’s 4% target provides the room to boost domestic demand (to offset the expected drag from exports), ” said Nomura Global Markets Research report dated 29 August. Given the lags in policy transmission, Nomura foresees 25 basis points cuts each by RBI in October and December.
