India’s economy has shown cracks in recent quarters. The country’s backbone has been its manufacturing sector, which is now stagnating. GDP growth is slowing as a result.
Once a promising story of industrial resurgence, is India’s “Make in India” dream fading into irrelevance? The numbers suggest it might be.
Weak manufacturing growth
Recent GDP data for the July-September quarter have been worrying. Manufacturing growth stood at just 2.2%, while export growth barely reached 2.8%.
In contrast, during the same period a year earlier, manufacturing was the key driver of India’s economy.
The broader GDP growth rate slumped to 5.4%, marking a seven-quarter low and far below the 8.1% recorded a year ago.
This slowdown has dragged first-half GDP growth in FY25 to 6.05%, far below the Reserve Bank of India’s optimistic projection of 7.2% for the year.
Economists have since revised growth forecasts downward to between 6% and 6.8%, with some predicting more headwinds for the second half.
What’s causing the stagnation?
Manufacturing’s share in India’s Gross Value Added (GVA) has declined over the last decade, falling from 18.1% in 2011-12 to 14.3% in 2022-23.
Additionally, manufacturing employment dropped from 51.3 million workers in 2017 to just 35.65 million in 2022-23, a loss of nearly 16 million jobs.
This contraction has raised serious questions about the effectiveness of India’s industrial policy.
Export growth has stagnated as well. India’s share of global merchandise exports grew rapidly between 2005 and 2015 but has since plateaued.
Competing nations like Vietnam and Bangladesh have overtaken India in labor-intensive industries such as garment manufacturing, capitalizing on efficient policies and better integration into global supply chains.
Adding to the troubles, imports from China continue to flood Indian markets, putting pressure on local small and medium enterprises (SMEs).
Despite repeated promises to reduce dependency on Chinese goods, India’s manufacturing ecosystem remains vulnerable.
Where is the domestic demand?
The urban middle class, a critical driver of consumption, is under financial stress.
Real urban wages declined 0.5% YoY in the July-September quarter, the first contraction since the pandemic.
Source: Bloomberg
In addition to stagnant wages, Inflation remains sticky.
October’s CPI came in at 6.21%, squeezing household budgets and reducing spending on discretionary items like cars and appliances.
Key companies, including Hindustan Unilever and Maruti Suzuki, have reported weaker earnings, citing reduced urban demand.
Analysts highlight subdued income growth as the primary cause of weak consumer finances, which now threaten broader economic momentum.
A slow capex recovery
Public and private investments are crucial to reigniting growth, but progress has been slow.
Government spending on infrastructure and other capital-intensive projects has lagged, with only 37% of the budgeted capital expenditure utilized in the first half of FY25.
This is significantly lower than the 49% spent during the same period last year.
Private corporate investments are also lackluster. High borrowing costs and weak profit margins have discouraged businesses from ramping up capacity.
What the RBI can (and can’t) do
The Reserve Bank of India faces a tough challenge.
With inflation still above target, the central bank is unlikely to cut interest rates in its upcoming December policy meeting.
However, many expect liquidity-boosting measures, such as a reduction in the Cash Reserve Ratio (CRR) or Statutory Liquidity Ratio (SLR), to ease pressure on the banking system.
Meanwhile, global trends are adding to the complexity. Trade tensions and slower growth in major economies, such as China and the United States, are dampening external demand for Indian goods.
Can India turn the tide?
India’s potential is still there, structural changes are urgently needed to reignite its economy.
The government must focus on improving export competitiveness by strengthening key sectors like textiles and electronics and fixing inefficiencies in logistics and infrastructure.
Small and medium enterprises, which are the backbone of the economy, need better support through access to affordable credit and reduced dependency on imports.
At the same time, policymakers need to address issues holding back domestic consumption.
Wage stagnation and inflation have weakened consumer spending, and a revival in household demand is essential to drive growth.
Accelerating government investments in infrastructure and industry could provide the spark needed to boost the economy, but time is running out to implement meaningful changes.
A fragile recovery ahead
The truth is, there are still signs of hope for India’s economy, despite the recent setbacks.
Rural consumption is picking up thanks to a strong agricultural season, and moderating food inflation could bolster household budgets in the coming months.
Government capex spending is also expected to accelerate in the second half of the fiscal year, which could provide a much-needed boost to growth.
But it’s still unclear whether these efforts will be enough to reverse India’s economic slowdown.
There’s also the possibility that the opportunity for industrial resurgence has already passed. The coming quarters will be critical in defining the next chapter of India’s growth story.
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