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Business activity stays above 60-mark in July despite global uncertainty

India's Business Activity Remains Robust in July, PMI Above 60 Amid Global Headwinds

In a resilient display of economic strength, India's business activity continued to expand at a healthy pace in July, with the HSBC Flash India Composite Purchasing Managers' Index (PMI) registering at 60.9. This marks a slight dip from June's 61.2 but comfortably stays above the critical 60-mark threshold, signaling sustained growth despite mounting global uncertainties. The data, released by HSBC in collaboration with S&P Global, underscores the Indian economy's ability to weather external pressures, including geopolitical tensions, supply chain disruptions, and inflationary trends worldwide.

The composite PMI, which encompasses both manufacturing and services sectors, has now remained above the 50-mark—indicating expansion—for an impressive 35 consecutive months. This streak highlights India's position as one of the fastest-growing major economies, even as global counterparts grapple with slowdowns. Economists attribute this buoyancy to robust domestic demand, strategic policy measures, and a rebound in consumer confidence post-pandemic. However, the marginal decline from June suggests that external factors are beginning to exert some influence, prompting calls for vigilant monitoring by policymakers.

Diving deeper into the sectoral breakdown, the manufacturing PMI eased to 57.9 in July from 58.5 in the previous month. While this represents a slowdown, it still reflects solid expansion driven by strong new order inflows and increased production levels. Manufacturers reported a rise in output, supported by favorable demand conditions both domestically and internationally. Export orders, in particular, showed resilience, with firms noting gains from markets in Asia, Europe, and the Middle East. This export performance is crucial, as it helps offset some of the vulnerabilities arising from global economic volatility.

On the services front, the PMI stood at 61.1, a slight decrease from June's 61.4, yet indicative of vigorous activity. The sector, which forms the backbone of India's economy, benefited from heightened business optimism and a surge in new contracts. Service providers highlighted improvements in client inquiries and project pipelines, particularly in areas like information technology, finance, and hospitality. The post-monsoon recovery in tourism and a pickup in corporate spending have further bolstered this segment, making it a key driver of the overall composite index.

One of the standout features of the July PMI report is the continued strength in employment generation. Both manufacturing and services sectors reported job creation at a pace that outstripped the long-term average. Firms are hiring to meet rising workloads, with backlogs of work accumulating due to capacity constraints. This employment growth is a positive sign for the broader economy, potentially alleviating some unemployment pressures and supporting household incomes. However, it's worth noting that the rate of job additions, while robust, has moderated slightly from previous highs, reflecting cautious optimism among businesses.

Despite these positives, the report is not without its cautionary notes. Input cost pressures intensified in July, with manufacturers and service providers alike facing higher prices for raw materials, energy, and labor. This uptick in costs led to increased output prices, as firms passed on a portion of the burden to customers. The inflation dynamics are particularly concerning in the context of global commodity price fluctuations, exacerbated by events such as the ongoing Russia-Ukraine conflict and supply disruptions in key shipping routes like the Red Sea. In India, these global factors are compounded by domestic issues, including erratic monsoon patterns that could impact agricultural output and food prices.

Pranjul Bhandari, Chief India Economist at HSBC, commented on the findings, stating that while the PMI data points to a "solid start to the third quarter," the softening in some sub-indices warrants attention. "The Indian economy is demonstrating remarkable resilience, but global uncertainties could pose risks to the growth trajectory if they persist," Bhandari noted. She emphasized the importance of monitoring export demand, which, although strong, showed signs of deceleration amid weakening global trade volumes.

Comparing July's figures to historical trends provides further context. The composite PMI has averaged around 59 over the past year, with peaks during periods of strong festive demand and troughs influenced by external shocks like the Omicron wave. The current reading of 60.9 aligns closely with pre-pandemic levels, suggesting a normalization of business activity. Moreover, India's PMI performance contrasts sharply with that of other major economies. For instance, the Eurozone's composite PMI dipped below 50 in recent months, signaling contraction, while the US has seen mixed signals amid high interest rates and election-year uncertainties. China's manufacturing PMI, hovering around the neutral mark, reflects ongoing challenges in its post-COVID recovery.

This divergence underscores India's relative insulation from global downturns, thanks to factors such as a large domestic market, government infrastructure spending, and reforms in areas like digital payments and manufacturing incentives. Initiatives like the Production Linked Incentive (PLI) scheme have encouraged investments in key sectors, contributing to the sustained PMI expansion. Additionally, the Reserve Bank of India's (RBI) prudent monetary policy—maintaining the repo rate at 6.5% in its latest review—has helped anchor inflation expectations while supporting growth.

Looking ahead, the PMI report offers insights into potential GDP growth for the July-September quarter. Economists project India's economy to grow at around 7-7.5% annually, driven by the services sector's momentum and a rebound in rural demand. However, risks abound. Global uncertainties, including potential escalations in Middle East tensions or a sharper-than-expected slowdown in advanced economies, could dampen export prospects. Domestically, inflationary pressures might prompt the RBI to delay rate cuts, which could temper investment sentiment.

Business leaders echoed these sentiments in the PMI survey. Many respondents expressed confidence in the year-ahead outlook, citing expected improvements in economic conditions and new product launches. Yet, a subset highlighted concerns over competitive pressures and rising costs, which could erode profit margins if not managed effectively. The survey's future output index, while still in expansionary territory, softened marginally, indicating a tempered optimism.

In terms of specific industries, the manufacturing sector saw notable gains in consumer goods and intermediate products, with firms ramping up inventories to meet anticipated demand. In services, the finance and insurance sub-sector led the charge, benefiting from digital transformation and increased lending activity. Real estate and business services also performed well, supported by urban development projects and corporate expansions.

The July PMI data also sheds light on supply chain dynamics. Delivery times for inputs improved slightly, suggesting some easing of logistical bottlenecks that plagued the economy earlier in the year. However, vendors reported capacity strains, leading to occasional delays. This mixed picture on supply chains reflects the broader global environment, where disruptions from events like port strikes or natural disasters continue to ripple through international trade.

From a policy perspective, the sustained PMI strength bolsters the case for continued fiscal support. The Indian government's focus on capital expenditure, as outlined in the recent Union Budget, is expected to sustain infrastructure-led growth. Measures to enhance ease of doing business, such as streamlined regulations and tax incentives, are likely to further encourage private sector participation.

In conclusion, India's business activity in July paints a picture of resilience and steady progress amid a turbulent global landscape. The PMI remaining above 60 is a testament to the economy's underlying strengths, even as headwinds like inflation and geopolitical risks loom. As the year progresses, maintaining this momentum will require a balanced approach from policymakers, businesses, and investors alike. With domestic drivers holding firm, India stands poised to navigate uncertainties and emerge as a bright spot in the global economy. This performance not only reinforces investor confidence but also positions the country for sustained long-term growth, provided external shocks are managed adeptly. (Word count: 1,048)

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