India’s manufacturing sector growth of 7% in Q1, highlights further potential – Economy News

By Vinay K Srivastava

India’s GDP growth rate for the first quarter of fiscal year 2024-25 is estimated at 6.7%, a significant fall from the 8.2% growth recorded in the same quarter a year ago.  This is the slowest GDP growth rate in five quarters, below the RBI’s estimated rate of 7.1%. Earlier, in the January-March quarter of FY2022-23, the growth was seen to be 6.2% less than the current growth rate. It is noteworthy that in the last 4 quarters of the financial year 2023-24 i.e. April-June, July-September, October-December and January-March, the growth rate was 8.2%, 8.1%, 8.6% and 7.8% respectively.

The growth in April-June of the current fiscal year was mainly driven by the significant expansion in the secondary sector, which recorded a healthy growth of 8.4%, led by a 10.5% growth in construction, a 10.4% in the supply of electricity, gas and water and a satisfactory growth rate in the manufacturing sector. However, this growth was partially offset by a downturn in the primary sector which declined from 4.2% to 2.7%, and the tertiary sector, which eased from 10.7% to 7.2%.

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The manufacturing sector witnessed a strong growth of 7% in the April-June quarter, outpacing the 5% growth recorded in the same period of the last fiscal year. However, this growth rate represents a decline of 1.9% from the previous quarter’s growth. Manufacturing is the cornerstone of any country’s economic growth as it generates a ripple effect that boosts employment, consumption, and production while attracting substantial investments.

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Acknowledging its importance, policymakers have long sought to unlock the sector’s potential to drive manufacturing growth, attract domestic and foreign investors, generate employment, and demand, and drive India’s economic growth. Narendra Modi-led governments have also consistently given priority to the development of the manufacturing sector to achieve the goal of transforming India into a $5 trillion economy.

Initiatives for the manufacturing sector

The budget speech for 2021-22 highlighted the imperative to achieve sustained double-digit growth in the manufacturing sector to propel the country towards this ambitious economic milestone. The government has launched a series of initiatives over the years to boost the manufacturing sector through supply-side measures, starting with the launch of cluster development in 1998, followed by capital subsidies to attract investment in 2000.

Subsequent initiatives included the establishment of industrial corridors in 2007 and a National Manufacturing Policy to enhance the share of manufacturing in GDP to 25% in 2011, improving ease of doing business and the ambitious ‘Make in India’ campaign in 2014. Further, the announcement of the Production Linked Incentive (PLI) scheme in March 2020, the Gati Shakti programme in 2021, the National Logistic Policy in 2022, and now most recently, the announcement of 12 industrial smart cities in August 2024, show continued commitment to manufacturing development.

Although the government’s efforts have yielded tangible results, a number of recently announced high-profile investments in key sectors such as electronics, chip manufacturing and battery production have drawn considerable attention and underline the sector’s growing allure for investors. However, even after this announcement, the pace of investment remains slow. Moreover, according to the Annual Survey of Industries by MoSPI, employment in the manufacturing sector saw a significant growth of 7.5%, from 1.72 crore in the last year to 1.85 crore in 2022-23. 

According to a December 2023 report by Colliers, India’s manufacturing market is poised to reach $1 trillion by 2025-26. However, achieving this ambitious target appears to be challenging, as the present share at current prices stands at $0.46 trillion. Furthermore, its contribution to Gross Value Added (GVA), which currently stands at 17.17% in real terms, is lower than the desired 25% target by 2025, raising doubts over the possibility of meeting this goal within the envisioned timeframe. 

A recent report by Nomura stated India’s electronics manufacturing is at a critical growth juncture, projected to quadruple to $450 billion by FY 2029-30 at a 25% CAGR. Key growth catalysts include increased sourcing by global technology leaders, rising domestic demand, and expanding applications in industries such as auto, railways, telecom, and defence, as well as a strong component ecosystem.

Additionally, the imposition of a special tax rate of 15% for new manufacturing companies has deeply impacted the manufacturing sector. This special scheme, combined with comprehensive and corporate tax cuts has led to a significant surge in the share of manufacturing in nominal GVA from 14.70% in FY 2019-20 to 15.43% in FY 2020-21 and further to 15.68% in the next FY 2021-22. After the peak, the ratio declined steadily, reaching 14.34% in FY 2022-23 and further dipping to 14.27% in FY 2023-24. The finance minister has now opted not to extend the special scheme in the mid-term Budget 2024.

Historically, the manufacturing sector has been a significant contributor to India’s industrial landscape, accounting for an average of 16.3% of the country’s nominal GVA over the past decade, highlighted in the Economic Survey 2021-22. However, despite the government’s endeavours to boost the sector, the average share of manufacturing in nominal GVA has slipped to 14.68% between FY 2020-21 and 2023-24. This declining trend underlines the challenges faced by the sectors in recent years.

Challenges for the manufacturing sector

The manufacturing sector in GVA has experienced volatile growth over the last eight quarters on a year-on-year basis. In Q1FY23, growth was recorded at 2.2%, followed by a decline of -7.2% in Q2FY23 and -4.8% in Q3FY23. However, Q4FY23 saw a slight recovery with growth at 0.9%. The sector then experienced a significant upswing with growth of 5% in Q1FY24, followed by a substantial growth of 14.3% in Q2FY24 and 11.5% in Q3FY24, with growth slowing slightly to 8.9% in Q4FY24. 

The manufacturing sector contracted to a three-month low in August 2024 amid sluggish output growth and new orders, According to the HSBC India Manufacturing Purchasing Managers’ Index (PMI) issued in September. A slowdown in manufacturing led to an annual decline of 1.8% in the eight core industrial sector index in August, down from a 6.1% expansion in July, according to provisional data released by the Ministry of Commerce. However, on the other hand, some experts believe that last year’s rapid growth has skewed the August results.

The performance of the manufacturing sector has been hindered by declining profitability mainly due to escalating input costs. The FICCI survey identified the key factors contributing to these increased costs, including rising raw material prices, labour costs, elevated freight charges, higher borrowing costs arising from increased interest rates and disruptions to supply chains, ultimately this involves squeezing profit margins and impending sector growth.

In conclusion, weak domestic and foreign demand is a major factor dragging down the manufacturing sector. While domestic demand grew by only 4.03% in FY 2023-24, exports increased by only 2.63%. Therefore, the government should focus on stimulating demand through initiatives that encourage consumption, investment and job creation. Furthermore, the government should work on simplifying labour laws, rationalizing GST rates, promoting MSMEs and removing barriers to boost the manufacturing sector. The 15% tax initiative shows promise, therefore, to propel growth, the government should offer tax incentives and streamline PLI scheme implementation.

(The author is an Associate Professor of Finance and Area Head at the Institute of Technology and Science, Ghaziabad. Views are the author’s own and not necessarily those of financialexpress.com).

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