Private sector activity moderates, but stays strong

India's private sector activity moderated to 61.9 in September from August's multi-year high of 63.2 but still recorded a strong expansion and the second-best reading in just over two years, according to a private survey released on Tuesday.

New business intakes expanded softly, alongside slower growth in private sector output and employment.

However, private firms remain optimistic about the outlook. Private sector confidence rose to a seven-month high, with anecdotal evidence suggesting capacity expansion, competitive pricing, robust demand, efficiency gains and marketing efforts as the main reasons. Some firms also expect benefits from the goods and services tax (GST) rate cut.

Earlier in September, the GST Council approved a two-slab structure of 5% and 18%, reducing prices on various daily household items.

The Composite Purchasing Managers' Index (PMI)-a weighted average of comparable manufacturing and services indices-was 63.2 in August and 58.3 in September 2024.

Factory production grew faster than services but both sectors recorded a slower pace. Manufacturing PMI fell to 58.5 in September from 59.3 in August, while services eased to 61.6 from 62.9.

"The manufacturing PMI moderated but its pace of expansion remains healthy," said Pranjul Bhandari, India chief economist at HSBC. New orders increased in September but declined from August. Several private firms suggested favourable demand conditions, while others noted competitive pressures limiting order growth.

"New domestic orders rose for the last two months, likely on the back of announcements of lower GST rates. All said, the impact of higher tariffs have been somewhat offset by lower tax rates in the data so far," noted Bhandari.

International orders expanded at their slowest rate in six months.

"The imposition of the 50% tariff rate by the US on India likely resulted in a slower rise in new export orders over August-September," said Bhandari. "This comes on the back of strong frontloading of exports to the US since early-2025."

The moderation also affected employment, with around 3% manufacturers and 5% of service providers adding jobs. "The vast majority of survey participants reported having sufficient labour for current requirements," the survey said.

On costs, September saw a milder increase overall, with the services sector slowing in contrast to a pickup in manufacturing. Apart from greater wage bills, survey respondents reported higher cotton, electronic components, oil, steel, vegetable and wood prices.