Manufacturing PMI Rebounds in January as Demand Improves, Markets Remain Cautious

India’s manufacturing sector showed fresh signs of life at the start of 2026, rebounding from December’s slowdown as demand, output and hiring gathered pace, offering a timely boost even as questions linger over the Budget’s fiscal trajectory.

The HSBC India Manufacturing Purchasing Managers’ Index (PMI) rose to 55.4 in January, up from a two-year low of 55.0 in December, signalling a stronger improvement in overall operating conditions. The reading reflects faster growth in new orders, production, employment and purchasing activity, pointing to renewed momentum on factory floors.

Survey respondents cited buoyant demand, new business inflows and higher technology investments as key drivers of the pickup. Output expanded at a sharper pace than in December, while new orders accelerated after briefly losing steam at the end of last year, supported by both domestic and export demand.

“Indian manufacturing firms saw a rebound in January, driven by increased new orders, output, and employment,” said Pranjul Bhandari, Chief India Economist at HSBC. However, she flagged a note of caution: input costs rose to a four-month high, squeezing margins, while business confidence slipped to its lowest level since July 2022, suggesting manufacturers remain wary about the road ahead.

Consumption tailwinds: Budget lifts rural demand hopes

Those demand signals find support in the government’s Union Budget 2026, which analysts believe could gradually strengthen consumption—especially in rural and semi-urban India.

A report by State Bank of India said the Budget’s measures are likely to have a moderately positive impact on the FMCG sector, largely by boosting rural incomes and employment. Proposals aimed at agriculture, fisheries, animal husbandry and high-value crops are expected to improve purchasing power at the grassroots level—an important demand engine for consumer goods companies.

Key initiatives include the launch of Bharat-VISTAAR, a multilingual AI platform integrating AgriStack and ICAR data to improve farm productivity, the integrated development of 500 reservoirs and Amrit Sarovars to strengthen fisheries, and support for animal husbandry entrepreneurship through credit-linked subsidies and modernisation.

The Budget’s focus on high-value crops—from coconut, cocoa and cashew in coastal regions to nuts and agarwood in hilly and northeastern states—could further diversify farm incomes. Meanwhile, the proposal to set up Self-Help Entrepreneur (SHE) Marts as community-owned retail outlets may improve last-mile distribution and market access for rural producers.

Taken together, SBI said easing food inflation, improving rural sentiment and steady employment conditions could support a gradual recovery in consumption demand.

Markets weigh growth push against fiscal caution

Yet, despite the PMI rebound and consumption optimism, not all market participants are convinced the macro picture is unambiguously positive.

Nomura struck a more cautious tone, welcoming the Budget’s continued emphasis on capital expenditure and manufacturing, but expressing disappointment over the slower pace of fiscal consolidation and higher-than-expected market borrowings.

The Budget pegged the fiscal deficit at 4.3% of GDP for 2026–27, marginally lower than the 4.4% target for 2025–26, and in line with the government’s stated consolidation path. Nomura, however, had expected a sharper reduction to 4.2%.

To fund the deficit, the government plans gross market borrowings of ₹17.2 lakh crore, up about 17% year-on-year, a figure that came in above market expectations. While the debt-to-GDP ratio is projected to edge down to

55.6%, Nomura warned that the pace of debt reduction will need to accelerate significantly over the remaining years to meet the 50% (±1%) target by FY31.

“While the overall budget assumptions are credible, the slower-than-expected consolidation trajectory is disappointing,” Nomura said, adding that fiscal rules will now increasingly focus on debt reduction rather than just deficit targets.

Still, the investment bank expects a cyclical recovery, projecting GDP growth of around 7.1% in 2026–27, supported by a modestly positive fiscal impulse.

Put together, the data tell a nuanced story. Factory activity is picking up, rural demand may strengthen, and policy continues to back capex-led growth. But rising costs, cautious business sentiment and fiscal trade-offs mean the recovery remains fragile rather than exuberant.

For now, India’s growth engine is revving again but markets are watching closely to see how smoothly it shifts gears.

(With inputs from ANI)