India's private sector economy experienced a marginal contraction in May 2026, with the HSBC Flash India PMI Composite Output Index standing at 58.1, down from 58.2 in April. According to the latest HSBC Flash India PMI data, this represents a notable shift from the previous month's expansion, signalling a weakening in overall economic momentum. The contraction was primarily driven by a pick-up in growth across the service economy being offset by a weaker increase in factory production. Pranjul Bhandari, Chief India Economist at HSBC, noted that manufacturing activity eased marginally as the rates of expansion in output and new orders moderated, while growth of new export orders softened markedly.
India's manufacturing sector experienced significant deterioration in May 2026, with the Manufacturing PMI falling to 54.3 from 54.7 in April, marking the second-weakest improvement in factory conditions in nearly four years. The manufacturing weakness was particularly pronounced as new export orders across India's private sector hit a 19-month low in May, with goods producers recording their second-slowest rise in international sales since September 2024. According to the PMI data, this represents the weakest growth in new export orders in 19 months, with panellists citing competitive pressures, challenging demand conditions, travel disruptions and the war in the Middle East as key factors dampening sales performance. After retreating in April, input price inflation ticked higher, but firms limited the pass-through of additional cost burdens to clients by lifting output charges to a lesser extent.
In contrast to manufacturing weakness, the services sector demonstrated resilience with the Services PMI inching up to 58.9 in May from 58.8 in April. Service providers outperformed manufacturers and experienced softer inflationary pressures compared to their manufacturing counterparts. The HSBC Flash India Services PMI Business Activity Index edged up to 58.9 from 58.8 in April, with service providers reporting softer inflationary pressures than manufacturers. This sectoral divergence helped offset some of the manufacturing weakness and contributed to the overall private sector expansion, with finished goods stocks rising for a second consecutive month and stocks of purchases increasing at the fastest rate in three months.
A global shift in capital is underway, with AI-driven growth and 'America-first' policies pulling global investors and firms to the U.S., challenging India's appeal as the world's fastest-growing economy. According to Motilal Oswal Financial Services, the U.S. is doing everything right for itself, reflected in the growing number of trillion-dollar market cap companies building next-generation AI and tech trends. Indian billionaire Gautam Adani is reportedly planning to invest $10 billion in the U.S. to create 15,000 jobs, while the U.S. Embassy announced that Indian companies plan to invest over $20 billion in the U.S. across industries. This trend raises concerns as India attracted foreign direct investment of $90.8 billion on a 12-month trailing basis ending January 2026, but net FDI remains at a near all-time low due to higher repatriation by foreign firms and overseas investment by Indian companies.
Despite the manufacturing challenges, business confidence remained strongly positive in May, with the overall level of positive sentiment remaining above its long-run average despite retreating to a three-month low. According to the PMI data, competitive pricing strategies, marketing efforts and hopes of better market conditions in the coming months underpinned optimism. The composite PMI's marginal contraction reflects the current geopolitical tensions impacting economic activity, though underlying fundamentals remain supportive. Cost pressures intensified, with input prices rising at the sharpest rate since July 2022, but firms maintained pricing discipline by limiting pass-through to clients, indicating cautious market conditions.
