The story of India’s manufacturing sector: Low growth, but optimistic future

By: Anshul Vipat

According to the survey, as many as 61 percent of respondents in the survey reported higher production levels in the second quarter of FY23 from a year before

The growth momentum in India’s manufacturing sector is likely to have picked up in the September quarter and may sustain for the next six to nine months over rising capacity utilisation. This is one of the major findings of a survey conducted by Federation of Indian Chambers of Commerce & Industry (FICCI). However, global economic uncertainty in the wake of the Russia-Ukraine war and increasing cases of various mutations of the Covid virus globally have exacerbated volatilities, impacting major economies, it pointed out.

According to the survey, as many as 61 percent of respondents in the survey reported higher production levels in the second quarter of FY23 from a year before. In the June quarter, 55 percent of the respondents had reported higher output. The investment outlook has also slightly improved, as close to 40 percent of respondents reported plans for capacity additions in the next six months, by as much as over 15 percent on an average, it added.

The survey suggested that capacity utilisation remained in the range of 64 percent to 90 percent across the ten sectors. Paper products led in capacity utilisation (95 percent), followed by auto and auto components (90 percent), textile machinery (90 percent), cement (75 percent), capital goods (73 percent), chemicals, fertiliser and pharma (70 percent), textiles (69 percent), machine tool (68 percent), electronics (65 percent) and metals and metal products (64 percent)

However the respondents also indicated that they were wary about their expansion plans due to the uncertainty caused by the Russia-Ukraine war, high raw material prices and increased cost of finance. The survey is based on the responses drawn from over 300 manufacturing units, both large and small, with a combined annual turnover of over Rs 2.8 trillion.

Optimistic future

Ficci’s survey results corroborate the findings of the PMI manufacturing survey, which showed decent expansion of the sector in both September and October. The seasonally-adjusted S&P Global India Manufacturing Purchasing Managers’ Index (PMI) was up from 55.1 in September to 55.3 in October. A print above 50 means expansion while that below 50 suggests contraction.

The October PMI data pointed to an improvement in overall operating conditions for the 16th month in a row. The consumer sentiment index is also all-time high indicating bright future for the manufacturing sector.

Need for a sustained growth

From fiscal year 2006 to fiscal year 2012, India’s manufacturing-sector GDP grew by an average of 9.5 percent per year. Then, over the next six years, growth declined to 7.4 percent.

In fiscal year 2020, manufacturing generated 17.4 percent of India’s GDP, little more than the 15.3 percent it had contributed in 2000. (By comparison, Vietnam’s manufacturing sector more than doubled its share of GDP during the same interval). And in the past 13 years, India’s manufacturing-sector share of employment increased by just one percentage point, compared with a five-point increase for the services sector.

The manufacturing sector played a key role in blunting the impact of the second Covid-wave. Manufacturing grew by 49.6 percent in March-June 2021 after falling by 36 percent in the same period last year. This was music to the ears of our policymakers, who are acutely aware of the importance of the sector if India’s is to bounce back quickly to the path of double-digit growth.

However, in the last three quarters there has been a slump in manufacturing activity. As the above chart shows, manufacturing sector grew only by 5.6 percent in Q2 FY22. It further shrank to 0.3 percent in the next quarter. The decline continued in the last quarter of the financial year as well contracting by 0.2 percent. Increasing inflationary pressures and supply chain bottlenecks contributed to this major decline. Thankfully, the sector showed resilience in March-June 2022 with a 4.8 percent growth. But this was nowhere near to 50 percent growth shown in the same quarter last year.

The resilience shown by the manufacturing sector immediately after the second COVID wave and the optimistic future displayed by manufactures in the FICCI survey needs to be celebrated. India stands out as one such country: a potential manufacturing powerhouse that has yet to realise its promise. This sector will have to play a major role if the country has to achieve its ambitious target of 5 trillion dollar economy.