Mixed Signals: India's Manufacturing Faces Boosts and Challenges as FY26 Begins

India's production showed signs of recovery towards the end of FY25, supported by indicators like manufacturing PMI and GST collections. However, the first quarter of FY26 may face pressures from global trade uncertainties and export risks, despite the RBI's rate cuts and easing trade tariffs offering some relief.

Towards the close of the last financial year, India’s production landscape exhibited signs of recovery, buoyed by positive developments in high-frequency indicators such as the manufacturing PMI, GST collections, and e-way bill generation. These insights were highlighted in a report by the Bank of Baroda.

However, the report cautions that the current fiscal year’s first quarter could be challenged by global trade uncertainties, particularly with export growth being a persisting risk. Notably, despite favorable domestic indicators, external factors remain a critical concern for the sector.

The Reserve Bank of India's policy rate reduction is expected to alleviate the cost of credit, providing relief to the manufacturing sector and potentially encouraging production. Meanwhile, a temporary hiatus on country-specific tariffs by the Trump administration and a decline in global commodity prices also present a brighter short-term outlook.

Yet, the latest industrial output data indicates a complex scenario. Growth in India’s Index of Industrial Production decelerated to 2.9% in February 2025, from 5.6% the previous year and 5.2% in January 2025. A broad-based decline in output was registered, particularly in the mining and electricity sectors.

While the manufacturing sector also reported a downturn, certain sub-sectors like pharmaceuticals, textiles, and computers/electronics achieved an upswing in performance. In contrast, key industries such as basic metals and motor vehicles saw declines.

Capital goods were the lone bright spot under the use-based classification, showing year-over-year growth in February 2025. In contrast, primary, intermediate, infrastructure, and consumer goods reported declines, albeit with a slower decline in non-durables than in the previous year.

Despite the uptick towards the end of FY25, with the fiscal year-to-date IIP growth moderating to 4.1% from 6% last year, the outlook for the first quarter of FY26 remains uncertain with ongoing US-China trade tensions and market volatility posing significant risks to growth. (ANI)