India’s factory activity growth took a significant hit in February 2025, reaching its lowest point in 14 months, signaling a slowdown in the country’s manufacturing sector. The decline was primarily attributed to cooling domestic and global demand, which has raised concerns about the country’s economic momentum. Despite strong growth earlier in 2024, the latest data suggests that the manufacturing sector, a key driver of India’s economic expansion, is beginning to feel the effects of weakening demand.
According to the S&P Global India Manufacturing Purchasing Managers’ Index (PMI) for February, factory activity grew at its slowest pace since December 2023. The PMI, which tracks changes in factory output, employment, and new orders, fell to 51.8 in February, down from 53.2 in January. While the index is still above the neutral 50 mark—indicating expansion—it marks a significant dip from the high levels seen in late 2024 and early 2025.
Cooling Demand and Reduced New Orders
The slowdown in factory activity is largely attributed to a cooling in both domestic and export demand, which has been the main driver of the dip in new orders. Many manufacturers reported reduced inflows of new business, especially from overseas markets, where demand has softened due to slower global economic growth and increasing inflationary pressures.
India’s export sector, which has been a significant contributor to manufacturing growth, has been facing challenges as major markets like the United States and the European Union grapple with economic uncertainties. Additionally, global supply chain disruptions and the ongoing geopolitical tensions have contributed to a more cautious approach to international trade, further impacting demand for Indian goods.
On the domestic front, consumer demand, which had been resilient in 2024, showed signs of cooling in February. Rising inflation, especially in food and fuel prices, combined with higher borrowing costs due to the Reserve Bank of India’s (RBI) interest rate hikes, have begun to dent consumer confidence. As purchasing power is squeezed, manufacturers are facing lower demand for non-essential goods and a slower rate of inventory replenishment.
Impact on Output and Employment
The drop in new orders directly affected production levels in February. Output growth slowed considerably, and companies struggled to maintain the high production levels seen in the previous months. Many manufacturers reported that they had to adjust their production schedules in response to weaker demand, which in turn led to a slower rate of expansion in factory output.
In response to the declining demand, companies also began to show caution in their hiring practices. Employment growth within the manufacturing sector moderated, and while there was still a net increase in staffing, it was not as robust as it had been in recent months. This shift may signal that manufacturers are adopting a more cautious stance in anticipation of continued uncertainty regarding demand levels.
The data also highlighted that the pace of purchasing activity had slowed as manufacturers reduced their stockpiles in line with the subdued demand environment. As a result, suppliers experienced a slight reduction in delivery times, which had previously been longer due to supply chain constraints.
Price Pressures and Inflation Concerns
Inflation continues to be a concern for manufacturers, even though there were signs of easing cost pressures in February. Input prices—such as raw materials, energy, and labor—remained elevated, and while there was a slight easing compared to previous months, the overall cost of production remained high. This persistent inflation is putting pressure on manufacturers’ margins, forcing them to either absorb the increased costs or pass them on to consumers in the form of higher prices.
The rise in input prices has also been linked to supply chain bottlenecks and the ongoing global inflationary trend. In addition, the domestic price of goods such as food and fuel has been rising, which continues to contribute to inflationary pressures. Although manufacturers have tried to manage these costs through efficiency gains and price adjustments, the ongoing pressure on prices is a key factor that could dampen future growth in the manufacturing sector.
Sector-Specific Challenges and Responses
The slowdown has been particularly noticeable in certain sectors within the manufacturing industry. For instance, the consumer goods and electronics sectors have reported weaker-than-expected demand, leading to lower output growth. Similarly, the capital goods and machinery sectors, which are typically driven by investment activities, also faced a slowdown as businesses delayed or scaled back their investment plans due to an uncertain economic outlook.
However, the overall slowdown is not uniform across all industries. Some sectors, such as chemicals and pharmaceuticals, have remained resilient, with demand supported by both domestic and international factors. The pharmaceutical sector, in particular, has continued to benefit from strong global demand for medical products and healthcare services.
Manufacturers have responded to these challenges by focusing on improving efficiency and reducing costs wherever possible. Companies have increasingly turned to automation and digital technologies to streamline operations and maintain competitiveness in the face of declining demand. However, these measures may not be enough to offset the broader slowdown unless demand picks up in the coming months.
Outlook for India’s Manufacturing Sector
The dip in factory activity growth in February raises several important questions for India’s economy moving forward. The slowdown in manufacturing could signal broader challenges for India’s growth in 2025, as the manufacturing sector is a significant contributor to GDP and employment. While the Indian government has implemented several measures to boost manufacturing and export growth—such as the Production-Linked Incentive (PLI) scheme for various sectors—the global economic environment remains uncertain, and challenges like high inflation, rising interest rates, and global supply chain disruptions continue to weigh on demand.
The Reserve Bank of India’s monetary policy will also play a crucial role in determining the future trajectory of the manufacturing sector. The central bank’s decision to raise interest rates to curb inflation has contributed to higher borrowing costs, which could further dampen investment and consumption. However, if inflationary pressures subside and global demand picks up, there is potential for a rebound in the manufacturing sector later in the year.
In the short term, the manufacturing sector will likely face challenges as companies adjust to cooling demand. However, if the government and central bank continue to implement policies that support growth and stabilize inflation, there is hope that the sector can recover and regain momentum in the second half of 2025.
Conclusion
India’s factory activity growth has taken a noticeable dip in February 2025, as cooling demand and inflationary pressures weigh on the manufacturing sector. While the slowdown is concerning, it is important to view this dip in the broader context of India’s economic performance. The manufacturing sector’s resilience in recent years and the government’s ongoing support for industrial growth provide a foundation for optimism. However, much will depend on global economic conditions, domestic demand recovery, and the effectiveness of government policies in boosting investment and consumption in the coming months.