India's manufacturing sector continued its downward trajectory in August, with slower output and new orders dragging factory activity to its weakest level in five years. The seasonally adjusted HSBC India Manufacturing Purchasing Managers' Index plummeted to 52.8, a six-month low that fell below the long-run average of 54.2.

The decline marked the weakest improvement in the health of the manufacturing sector in five years, with Pranjul Bhandari, chief India economist at HSBC, attributing it to "weaker upturns to challenging market conditions and subdued appetite for some products." Consumer goods, however, bucked the trend, remaining an exception to the overall slowdown.

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Manufacturing employment contracted in August, ending two-and-a-half years of job growth. The decline was fractional, with companies citing lower operational requirements as the reason for reducing payrolls. "Employment edged into a mild contraction in August, the first decline after more than two years of job growth," Bhandari noted.

Despite easing input cost pressures, manufacturers faced challenges. Demand from overseas markets softened, with new export orders coming in from Australia, Germany, mainland China, Spain, Thailand, and the United States, but at a slower rate than in July. Manufacturers continued to purchase goods for the 62nd consecutive month, but the expansion rate was the weakest on record.

Inventory levels also rose, with finished goods stocks increasing for the second consecutive month as sales slowed. The accumulation of pre-production stocks eased to its lowest level since April. Cost pressures eased, with input cost inflation falling to a six-month low and selling price increases becoming less pronounced.

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Output prices rose at their slowest rate in 45 months, with fewer than 7% of monitored firms increasing prices. Those companies raised selling prices to remain competitive and protect order volumes. Business confidence strengthened during the month, reaching its highest level since May, but remained subdued.

About 16% of surveyed companies expected production to increase over the next 12 months, while all others expected their output levels to remain steady.