India's manufacturing sector displayed a notable rebound in January 2026, with the HSBC India Manufacturing Purchasing Managers' Index (PMI) climbing to 55.4 from 55.0 in December, according to data compiled by S&P Global. This uptick follows a dip to a two-year low in the previous month, signaling a recovery in factory activity after growth momentum waned at the end of 2025.
Key Drivers of the Rebound
The seasonally adjusted PMI, which measures new orders, output, employment, supplier delivery times, and stocks of purchases, indicated a stronger improvement in overall operating conditions. Indian goods producers reported faster increases in new orders, output, employment, and purchasing activity during January. Pranjul Bhandari, chief India economist, noted that the rebound was driven by increased new orders, output, and employment, with consumer goods emerging as the strongest segment, while capital goods saw the slowest improvement.
Domestic Demand and Export Challenges
Domestic demand remained the primary driver of sales, supporting production through buoyant demand, new business wins, and technology investments. Output rose sharply and at a quicker pace than in December. However, new export orders increased at one of the weakest rates in 15 months, with firms citing higher demand from regions such as Asia, Australia, Canada, Europe, and West Asia. This muted export momentum highlights ongoing challenges in the global trade environment.
Cost Pressures and Pricing Dynamics
Input prices rose to the greatest extent in four months, albeit at a level negligible by historical standards, while charge inflation eased further. Competitive pricing helped lift volumes, as output charges rose only modestly and at the weakest pace in nearly two years. Many firms attributed limited price increases to improved efficiency, better cost management, and intense competition, resulting in slight margin pressure for manufacturers.
Business Confidence at a Low Ebb
Despite the rebound in activity, business confidence among manufacturers sank to its weakest level in more than three years. The survey revealed that only 15% of companies expect output growth in the year ahead, with 83% forecasting no change. This decline in optimism reflects concerns over a muted outlook, weak export momentum, and rising cost pressures, weighing heavily on sentiment.
Broader Economic Context
The improvement in manufacturing activity occurs against a backdrop of geopolitical volatility and steep 50% tariffs imposed by the US on India. The PMI data aligns with the Economic Survey for FY26, which projects economic growth of 7.4% in the ongoing fiscal year (FY27), driven by consumption and investment, with real GDP growth pegged at 6.8-7.2% for FY27.
Government Measures and Fiscal Outlook
In the Union Budget for FY27, Finance Minister Nirmala Sitharaman outlined measures aimed at sustaining growth, expanding opportunities across regions and sectors, strengthening the financial system, and accelerating adoption of cutting-edge technologies like artificial intelligence. The Centre has projected a fiscal deficit of 4.3% of GDP for FY27, with a targeted debt-to-GDP ratio of 55.6%.
Future Growth Prospects
Crisil warned that growth is likely to normalize amid a challenging global trade environment, a mildly lower fiscal impulse, and waning support from statistical factors such as a low deflator. Nevertheless, growth is expected to remain slightly above its decadal trend, driven by healthy consumption and sustained government capital expenditure. Improvement in private investments will be underpinned by low interest rates and healthy corporate balance sheets, though global uncertainties could pose risks.
Overall, while India's manufacturing PMI shows resilience with continued expansion above the 50.0 threshold since July 2021, the sharp decline in business confidence underscores the need for cautious optimism as the sector navigates domestic and international headwinds.
