India Manufacturing Growth Faces Squeeze Amid Rising Costs

India's manufacturing sector showed resilience in the fourth quarter of fiscal year 2025-26, supported by strong domestic demand and stable exports. However, deeper analysis shows underlying pressures that could slow future growth. A survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) reveals a contrast: output is growing, but the cost of that growth is rising sharply. Manufacturers also face greater difficulty in fully using their capacity and expanding operations.

Demand Drivers Hold Strong

Manufacturing output in Q4 FY26 continued to rise, with 93% of surveyed firms reporting higher or unchanged production levels, a slight increase from the prior quarter. Domestic demand was strong, with 89% of respondents expecting similar or higher order volumes than the last quarter. Export sentiment was stable, with about 80% of manufacturers forecasting higher or unchanged international sales. The hiring outlook improved, with 41% of firms planning to expand their workforce in the next three months, up from 38%. Over 86% of respondents found access to finance adequate, with an average interest rate of 8.85%. These factors suggest the sector continues to expand, though possibly at a slower pace.

The Margin Squeeze Accelerates

However, survey data shows growing concerns for profitability. Nearly 70% of manufacturers reported higher production costs relative to sales, a sharp increase from 57% last quarter. This rise is due to higher raw material prices, a weaker rupee, and increased costs for logistics, power, and utilities. Globally, input costs have also surged, hitting 44-month highs in April 2026 due to energy and shipping expenses, worsened by geopolitical tensions. This growing cost pressure in India makes it harder for manufacturers to turn revenue growth into higher profits.

Sectoral Capacity Utilization Diverges

Overall manufacturing capacity utilization saw a slight drop to about 72% in Q4 FY26. This is lower than the average seen previously, around 75% in January 2026 and 77.7% in Q4 FY25. The survey also showed wide differences across major sectors. Textiles, apparel, and technical textiles reported strong utilization at 76.4%, followed by metal products (76%) and automotive components (75.7%). In contrast, capital goods (69%) and electronics and electricals (68%) had lower utilization, indicating uneven performance and underused assets in key areas.

Expansion Hurdles and Global Context

Manufacturers pointed to several obstacles for capacity expansion: global uncertainty, trade limits, labor shortages, raw material scarcity, and regulatory hurdles. These issues, along with global supply chain problems and longer lead times observed in April 2026, create a challenging operating environment. India's manufacturing PMI rose slightly to 54.7 in April 2026, but new business and output growth were the second-slowest in nearly four years, showing weaker demand momentum despite cost pressures. Globally, manufacturing output grew fastest in nearly five years in April 2026, partly due to companies building inventory ahead of expected disruptions. India's output is forecast to grow by 5% in 2026, placing it well within Asia's growth story.

Key Risks to Profitability

While headline growth figures appear positive, deeper examination reveals potential weaknesses. Soaring input costs for raw materials and logistics directly threaten profit margins. The significant rise in manufacturers reporting higher costs (70% vs. 57% previously) suggests a squeeze that could offset revenue gains. The slight drop in overall capacity utilization is concerning given strong demand and reported expansion difficulties, hinting that output growth might be limited by factors other than demand. The gap between strong domestic demand and actual capacity use, combined with rising costs, could prompt a review of the sector's true efficiency and profit path. The Indian Rupee's depreciation, trading around 94.4170 on May 6, 2026, while supporting exports, also makes imported raw materials and components more expensive. These combined pressures – rising costs, lower capacity use, and expansion hurdles – warrant caution about sustained profit margins and the ability to add value without significant profit erosion. Ongoing regulatory issues also present a background challenge for expanding capacity.

Future Outlook

Looking ahead, India's manufacturing sector is expected to continue growing, with output projected to rise by 5% in 2026. Government initiatives like PLI schemes and the promotion of integrated manufacturing hubs should support long-term development and technological advancement. However, the near term will likely involve balancing strong demand against persistent pressure from rising input costs. Market watchers will closely follow key indices like the Nifty India Manufacturing Index (trading around 15,858.80 on May 6, 2026) and the BSE India Manufacturing Index (trading around 1110.79 on May 6, 2026) to see how investors are reacting to these competing pressures. The projected USD/INR rate around 94.59 by the end of Q2 2026 indicates continued currency volatility, which will affect import costs and export competitiveness.