Global Trends And Government Policies Usher In A Golden Era For Indian Manufacturing

By Mr. Yogesh Patil, CIO - Equity LIC Mutual Fund Asset Management Ltd

Global Trends And Government Policies Usher In A Golden Era For Indian Manufacturing
Mr. Yogesh Patil, CIO - Equity LIC Mutual Fund Asset Management Ltd
28 June 2024

After the formation of the government, it is clear that its policy framework and pro-growth approach are likely to continue. The government is well positioned to utilise all available tools to boost economic growth. The Indian manufacturing sector is all set to benefit from these efforts, especially with favourable global factors.

Investments & manufacturing growth

The government’s objective is to increase nominal gross domestic product (GDP) by promoting investments. Actions speak louder than words. Over the past three years the gross fixed capital formation (GFCF) has been rising. According to the second advance estimates, GFCF is at Rs 92 trillion in FY24 compared to Rs 82 trillion in FY23 and Rs 69 trillion in FY22, at current prices. During the same period, the share of GFCF in the gross domestic product (GDP) of the nation has increased to 31.3% from 29.6%. For FY24, it is estimated that the private and government contributions will make up about half of the GFCF for the year. And forecasts suggest this is expected to triple in the next six years.

Sectors such as chemicals, forging, auto ancillaries, engineering, defence, and power equipment are expected to benefit as the investment cycle accelerates. The Indian government has been emphasising import substitution and promoting exports, particularly of high-value goods. This strategy of investing in manufacturing gets boost from the China plus one strategy, where the developed nations seek alternatives to sourcing from China. The deglobalization trend is also changing global trade dynamics, with Indian manufacturing poised to benefit significantly.

Urbanisation, another global phenomenon, is unfolding in India. More than 50% of the Indian population is expected to live in cities and towns, up from around 35% a couple of years ago. This urbanisation should spur demand for premium quality goods, providing further traction for the manufacturing sector. Manufacturing companies are expected to cater to a much larger market –both domestic and global.

Export benefits

A strong performance by Indian manufacturing sector can boost the image of the Indian economy. The Indian software services industry has excelled in exports markets. Achieving similar success in high-value goods exports, like defence equipment, capital goods, and engineering, similar to pharma exports, would be a big positive. The Indian manufacturing sector has the potential to emerge as a supplier of choice for many countries in the world. It will also open multiple sources of earning foreign exchange for India and should improve India’s trade balance. This could also make the Indian currency more stable compared to its global peers.

Manufacturing balances consumption

Policymakers often face a choice between investment-led growth or consumption-led growth. They have to monitor various trend in consumption as well the consumption spikes. They have to ensure that local production meet demand to maintain the trade balance. These challenges can be best addressed by a strong manufacturing sector.

Significant investments in manufacturing capacities can create jobs, which is an important objective of the government. Job creation can help to encash our nation’s demographic dividend. Many jobs in the manufacturing sector go to individuals living at the bottom of the pyramid – semi-skilled and un-skilled workers. This should lead to an increased demand for labour and raise wages. This in turn results in higher per capita income and higher per capita consumption.

The consumption cycle should follow the investment cycle as manufacturing companies pay wages, putting money into the hands of the people. A government focused on fiscal prudence is more likely to prefer this approach of uplifting the population out of poverty. Government’s expenditure on welfare and subsidies may decrease as a percentage of the GDP and that should help to tide over fiscal deficit.

As more households experience increased cashflows, they are likely to consume more goods and services. This should kickstart a virtuous cycle. Jobs in manufacturing create ability to consume and boost consumption. This increased consumption in turn drives production, thereby creating more capacities and jobs.

Given these factors, it is evident that the golden period of Indian manufacturing sector has begun, and it can ensure a balanced growth in India.

Gross Fixed Capital Formation:

Urbanisation :


Sources: Corporate capex plans

Disclaimer: This disclaimer informs readers that the views, thoughts, and opinions expressed in the article belong solely to the author, and not necessarily to the author's employer, organization, committee, or other group or individual. The information in this article alone is not sufficient and should not be used for the development or implementation of an investment strategy. Past performance may or may not be sustainable in future and is not a guarantee of any future returns. Neither the Sponsors/the AMC/ the Trustee Company/ their associates/ any person connected with it, accepts any liability arising from the use of this information.



Latest Issue

Outlook Money
July 2024