Services boom, factory strength put India’s economy in a sweet spot

India’s services sector expanded in August at its fastest pace in 15 years, underscoring the resilience of domestic demand and giving a strong boost to the broader economy even as global headwinds mount.

The HSBC India Services Purchasing Managers’ Index rose to 62.9 in August from 60.5 in July, the highest reading since 2010.

The sharp acceleration was powered by a surge in new business inflows, including export demand, and accompanied by fresh hiring and renewed business confidence.

It was also the forty-ninth straight month of expansion in services, a sector that accounts for more than half of India’s gross domestic product (GDP).

The momentum was broad-based, with travel, hospitality, telecom, finance and business services all reporting strong gains.

Firms pointed to robust domestic demand as households and corporates stepped up spending ahead of the festive season.

Export orders for services also rose, adding to optimism that India is capturing a greater share of global outsourcing and digital work at a time when companies in developed markets are looking to cut costs.

The pace of growth was the strongest since before the global financial crisis, reflecting a rare convergence of resilient consumption and corporate investment.

The strength of the services sector lifted the composite index, which combines services and manufacturing activity, to 63.2 in August, the highest in nearly two decades. That composite figure was supported not only by the services surge but also by a parallel rebound in manufacturing, where output rose at the fastest clip in more than 17 years.

The manufacturing PMI climbed to 59.3 in August from 58.1 in July, confirming that factories as well as service providers are benefiting from steady demand.

In manufacturing, the pickup was led by consumer goods and capital goods, with automakers, electrical equipment producers and intermediate goods suppliers all reporting higher orders.

Domestic demand carried the bulk of the load, with export orders growing more modestly as global uncertainty and trade frictions weighed on overseas demand.

Production levels rose sharply, firms continued to expand employment for the eighteenth consecutive month, and inventory levels, both of inputs and finished goods, increased as companies geared up for sustained demand.

Manufacturers also reported stronger backlogs, suggesting that momentum may carry into the final months of the year. Both sectors, however, flagged intensifying cost pressures.

Services firms reported input costs at a nine-month high, ranging from wages to utility bills, while manufacturers noted higher prices for metals, energy and transport.

In response, companies passed on costs to consumers, with output charges rising at their steepest pace since 2012 in services and continuing to climb in manufacturing.

The data points to a build-up of inflationary pressure even as growth accelerates, setting up a potential dilemma for policymakers at the Reserve Bank of India.

For now, the focus is on the growth story.

Economists said the PMI surveys confirm that India’s economy is firing on multiple cylinders, with domestic consumption driving services and government infrastructure spending supporting manufacturing.

Analysts expect the festive season to reinforce momentum in both areas, particularly in retail, travel and housing.

HSBC’s report noted that business sentiment among service providers is at its most optimistic in over a year, with firms expecting new orders to remain strong through the rest of 2025.

The context makes the latest data more striking. Services have been on an expansion streak since the economy emerged from the pandemic shock in mid-2020, but the recent surge marks a step-change.

Companies are reporting not only higher volumes but also a greater willingness by clients to commit to longer contracts.

In manufacturing, the 17-and-a-half-year high underscores that India is consolidating its role as an alternative production base as supply chains diversify away from China.

Government initiatives such as the production-linked incentive schemes for electronics, solar and semiconductors are reinforcing this shift. The PMI readings stand in contrast to many Asian peers.

Japan, South Korea and Taiwan all reported weaker manufacturing PMIs in August, with export-driven firms suffering from slower global demand and supply bottlenecks.

India’s combination of robust services and strengthening factories highlights its increasingly diversified growth profile, with domestic demand cushioning external risks.

Meanwhile, economists warned that while the PMI surge bodes well for growth, it also raises the risk of more persistent price pressures.

The RBI has held rates steady this year, but a sharper pickup in services inflation could force a rethink, particularly if food prices remain elevated.

Finance minister Nirmala Sitharaman said the services data show “the Indian economy’s innate strength at a time of global uncertainty.”

Business leaders also welcomed the survey results, noting that demand across both sectors gives them confidence to expand hiring and investment.

Export orders in manufacturing remain vulnerable to protectionist trade measures such as the US tariff hikes on Indian goods. Services exports, though robust, depend on global clients maintaining spending on IT, outsourcing and consulting. Domestically, inflation could sap purchasing power if companies continue to raise prices aggressively.