Sectoral Analysis

Post-Budget Boom or Bust? The Future of India’s Manufacturing Sector

20 Jan 20248 Min Read

Contributing around 16-17% of the GDP, the manufacturing sector is the strong engine of India’s economic growth. To boost this sector, the government is targeting to increase this contribution to 25% by 2025.

The Nifty India Manufacturing Index—a key indicator that investors watch—surged 60% over the last year (till June 2024), far outperforming the broader stock market, which rose a more modest 26% during this period. This enthusiasm suggests investor optimism and supports the hypothesis of India becoming a global manufacturing leader.

The big question is whether this momentum can last after the recent budget of July 2024. The government’s policies will be crucial in areas like job creation, infrastructure development, and, ultimately, India’s standing in the world market.

Manufacturing Sector: The Present Scenario

The Indian manufacturing industry has shown exceptional performance, growing by 9.9% in FY24. With manufacturing activity hitting a 16-year high (59.1 in March 2024) and ambitions of becoming a $10 trillion economy, keeping this growth going is more important than ever.

One key indicator that measures the sector’s health is the Manufacturing Purchasing Managers’ Index or PMI. This index, based on monthly surveys of industry managers, reflects business conditions. A PMI exceeding 50 signals expansion, while a reading below 50 indicates contraction.

Here are key reasons why India’s manufacturing industry is thriving:

Shifting geopolitical dynamics (China + 1), where companies diversify their manufacturing operations by setting up production in at least one other country in addition to China.
Growing consumption, investments, and exports.
The government’s push for self-reliance through programs like Atmanirbhar Bharat.
India being the largest pool of cost-effective labour.

Key Factors Driving Manufacturing Industries

Government Initiatives
The Indian government has played an essential role in supporting the manufacturing sector through initiatives like:

Make in India
Industrial Corridor Development Programme
PM Gati Shakti National Master Plan
Production Linked Incentive (PLI) scheme, etc.

These initiatives can stimulate investments, enhance infrastructure, and provide a business-friendly regulatory environment.

Growing Population
India’s massive and growing population with increasing disposable income creates a significant domestic demand for manufactured goods - making it among the top 3 markets for key products globally - providing the necessary support to local manufacturing.

Cost-Effective Labour
India boasts a vast pool of skilled and unskilled labor, offering a significant cost advantage globally. This has the potential to both improve production efficiency and reduce labor costs.

Favorable Tax Rates
Indian corporate tax rates are competitive, and even lower rates apply for new manufacturing units beginning operations before March 2024. Thus providing support to this sector.

Budget 2024: Strategic Allocation to Boost Manufacturing Sector

To fulfill the goal of ‘Viksit Bharat’, the Budget 24-25 will focus on nine priorities:

Productivity and resilience in agriculture
Employment and skilling
Inclusive human resource development and social justice
Manufacturing and services
Urban development
Energy security
Infrastructure
Innovation, research and development, and
Next generation reforms

Special attention will be given to manufacturing and MSMEs - particularly labor-intensive manufacturing. A separate fund will provide a guarantee of up to ₹100 crore for each eligible MSME loan. However, the loan amount may be larger.
A new mechanism will ensure MSMEs can continue receiving bank credit even if they face temporary financial difficulties. For entrepreneurs with a good track record under the Mudra scheme’s ‘Tarun’ category (who have successfully repaid previous loans), the maximum loan amount has been doubled from ₹10 lakh to ₹20 lakh.

MSMEs will also be assisted by setting up 50 multi-product food irradiation units.

Will the Momentum Sustain?

India’s economy is off to a roaring start in 2024, building on the strong momentum seen in the last quarter of 2023. The economy grew by an impressive 8.4% year-on-year, with manufacturing leading the charge at a breakneck pace of 11.6%.

The question arises: Is this golden run in manufacturing sustainable for India? Experts are cautiously optimistic. Government policies like the PLI scheme give significant impetus to vital sectors such as steel, pharmaceuticals, and electronics. Agriculture, another pillar of the Indian economy, is poised for potential revival, which can boost overall growth further.

Indian manufacturers themselves are brimming with confidence. They expect higher output levels in the coming year, fueled by strong business sentiment and anticipation of high demand. They also see opportunities to expand their reach through increased advertising and brand recognition efforts.

India is well-positioned to capitalize on the growing trend of supply chain diversification. In this case, countries seek to lessen dependence on traditional manufacturing hubs, hence making it easier for India to attract new investments that would make it a significant player in the global manufacturing landscape.

Despite being optimistic about the future, one should be watchful of any potential barriers that could jeopardize this progress.

Bottomline

Factors such as government initiatives, a large domestic market, and a skilled workforce drive India’s manufacturing sector to an era of robust growth.

Furthermore, there is a reason to be optimistic. The recent budget allocated funds for manufacturing and small businesses, and global trends have created new opportunities for investment in the country.

However, challenges remain. The government’s success will depend on issues like job creation, improving infrastructure, and maintaining a competitive business environment in the country.