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Reviving Manufacturing Growth
Context:
The Union Budget 2025-26 will be presented against a backdrop of economic slowdown, with India’s GDP growth declining to a seven-quarter low of 5.4% in the second quarter of 2024-25.
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- This marked slowdown, coupled with downgraded growth forecasts for the fiscal year from 7% to around 6.5%, highlights the challenges the economy faces.
- Geopolitical uncertainties, including the ripple effects of Trump 2.0 trade policies, stagnant exports, and reduced foreign direct investment (FDI), have further compounded the situation.
Economic Snapshot
- The slowdown has been largely driven by the deceleration in the manufacturing sector, which fell sharply
- Meanwhile, agriculture showed improvement, growing from 2.0% to 3.5%, and the services sector maintained robust growth at 7.1%.
- However, sluggish industrial activity has impacted employment sentiment, raising concerns about job creation.
- The manufacturing sector’s slowdown can be attributed to weaker consumption, investment, and export performance:
- Private consumption growth moderated from 7.4% in Q1 to 6.0% in Q2, although government consumption rebounded to 4.4%.
- Fixed investment growth declined from 7.5% to 5.4%.
- Merchandise exports grew marginally by 1.6% during April-December 2024, reaching $321.71 billion.
Status of Manufacturing Sector
Growth Rate: The manufacturing sector is projected to experience a significant slowdown, with growth estimates dropping from 9.9% in FY 2023-24 to 5.3% in FY 2025.
Contribution to GDP: Currently, manufacturing contributes approximately 17% to India’s GDP, with government ambitions to increase this share to 25% by 2025.
Priorities for the Budget
- The finance minister’s primary focus will be reviving and accelerating economic growth by building on the momentum of government capital expenditure (capex).
- While the implementation of the 2023-24 capex plan faced challenges due to institutional bottlenecks and the election-related code of conduct, the upcoming budget is expected to allocate higher funds for infrastructure development to crowd in private investment.
- The goal is to reignite growth engines to elevate GDP growth to the 7-8% range in the medium term while addressing the critical need for job creation.
- This requires a targeted approach to bolster the manufacturing sector, particularly labour-intensive industries, which have significant potential to generate employment and drive exports.
Apparel Sector: A Focus Area
- The apparel sector stands out as a high-potential industry, given its ability to generate employment and leverage India’s comprehensive value chain—from cotton production to garment manufacturing.
- Despite these advantages, India’s apparel exports remain modest at $18 billion, with just a 3.6% share of the global market.
- In comparison, China exported $182 billion, while Bangladesh and Vietnam exported $45 billion and $35 billion, respectively.
- With global corporations restructuring supply chains under the China+1 strategy, India has a unique opportunity to attract investments and increase its market share, particularly as Bangladesh faces political uncertainties and Trump-era tariffs on Chinese exports come into play.
- Studies, such as the India Industrial Development Report 2024-25, have pointed to the suboptimal scale of operations as a key reason for India’s poor performance in the apparel sector.
- Extending production-linked incentives (PLI) to apparel manufacturing could encourage large business houses like Aditya Birla Group, Tatas, Reliance, and Raymond to localise garment production for both domestic and export markets.
- By leveraging global alliances and creating jobs, such initiatives can provide a much-needed boost to the sector.
Addressing Dumping and Protecting Domestic Industry
- The budget must also tackle the growing threat of cheap imports, particularly from China, which has been dumping labour-intensive consumer goods and intermediate goods like steel and machinery into India’s markets.
- While China has built vast production capacities to dominate global manufacturing, protectionist measures in advanced economies have redirected its exports to markets like India, which has a rapidly expanding middle class.
- The impact of dumping is evident in Southeast Asia, where over 1,500 factories in Thailand have closed due to the influx of Chinese goods.
- Similar threats loom over India’s micro, small, and medium enterprises (MSMEs), which employ millions.
- The budget is expected to introduce measures to protect domestic industries from dumping, foster job creation, and capitalise on rising domestic demand.
The 2025-26 Budget has the dual responsibility of addressing immediate economic challenges while laying the foundation for sustainable and inclusive growth. By aligning fiscal priorities with these goals, the government can drive India’s economic resurgence and advance toward its vision of “Viksit Bharat @2047.”
