Factories hold, farms falter: HSBC sees uneven momentum in India’s economy

Manufacturing, which accounts for about a fifth of India’s gross domestic product, has held up despite a rise in energy and industrial input costs between March and May, the economists said. They attributed the resilience to two factors: companies building up inventories, particularly in consumer goods, amid uncertainty in energy markets, and exporters accelerating non-oil shipments to take advantage of a temporary reduction in U.S. tariffs before possible Section 301 duties take effect.

Core exports, which had been declining by an average of about 2.7% a month between December and February, grew by an average of 2.8% a month between March and May, according to the report. Industrial production has also trended higher since late last year on a seasonally adjusted basis, HSBC’s calculations show.

Agriculture under pressure

The report struck a more cautious note on agriculture, which makes up a similar share of output. HSBC’s economists cited forecasts for a ‘very strong El Niño’ as a risk to the sector in the coming months.

Maximum temperatures across Indian cities are running above normal, cumulative monsoon rainfall was about 30% below normal as of July 3, and reservoir levels stood at 28% of capacity, below both the historical average and last year’s level of 30%, the report said.

Sowing has been slower as a result. About 17% of the normal cropped area had been sown as of late June, compared with roughly 24% at the same point a year earlier, according to the data. Oilseeds and pulses, crops India typically imports when domestic supply falls short, showed the steepest shortfalls, the economists said.

Rural demand indicators are already showing signs of strain, the report said. Youth unemployment has risen faster in rural areas than in cities over the past year. Growth in two-wheeler sales and in rural bank deposits, including Jan Dhan accounts, has slowed, and domestic goods and services tax collections softened in June.

A test for services

With manufacturing’s current strength seen as potentially temporary and agriculture facing headwinds, HSBC’s economists said the outlook for the second half of the year will hinge on services, which account for about 55% of GDP.

As per the report, two developments could support the sector: the decline in oil prices, from around $118 a barrel in the spring to roughly $72 a barrel in early July, should benefit trade and transport, which makes up about 15% of GDP. Easing financial conditions tied to a foreign-exchange package could also support the financial sector, which accounts for about a quarter of GDP.

Yields across government and corporate debt have already fallen over the past month, the report said, with three-month certificate of deposit yields down 113 basis points and 10-year corporate bond yields down 34 basis points since June 5. The economists noted the declines had occurred even before capital inflows tied to the FX package materialised in full.

Bank credit growth climbed to nearly 17% year-on-year by June, up from about 10% a year earlier, as companies shifted toward bank borrowing over corporate bonds following a rise in bond yields earlier in the year, according to the report.

The report did not provide a specific growth forecast for the second half of the year but it noted how services perform in the coming months, against a weak monsoon and unresolved questions over US tariffs, will largely determine the shape of India’s growth story for 2026.