In recent years, India’s economic system has begun to show cracks. India’s manufacturing sector has long been the backbone of its economy, but it is currently stagnating. The GDP is being affected by this.
Is India’s dream of “Make in India”, once a story full of promise for industrial revival, fading away into insignificance? It’s possible.
Manufacturing growth is weak
The recent GDP figures for the quarter July-September are alarming. Export growth was only 2.8%, but manufacturing growth was just 2.2%.
In comparison, a year ago, India’s economic growth was largely driven by manufacturing.
The overall GDP rate fell to a low of 5.4%. This is a 7-quarters’ lowest and well below the 8.1% growth recorded last year.
The Reserve Bank of India had projected a 7.2% growth for FY25, but the slowdown in the first half of the year has brought it down to just 6.05%.
Some economists predict that the growth rate will be between 6 and 6.8% in the second half.
What is causing this stagnation?
The manufacturing share of India’s gross value added (GVA), which was 18.1% in 2011, has fallen to just 14.3% by 2022/23.
In addition, the manufacturing sector lost nearly 16,000,000 jobs between 2017 and 2022/23.
The effectiveness of India’s industrial policies has been seriously questioned by this contraction.
The growth of exports has also stagnated. India’s global export share grew quickly between 2005 and 2015. Since then, it has plateaued.
Vietnam and Bangladesh, two competing nations in the labor-intensive garment industry have surpassed India. They did this by implementing more efficient policies and integrating better into global supply chain.
Imports continue to flood the Indian market, adding to this problem. This puts pressure on small and medium businesses (SMEs) in India.
India’s manufacturing eco-system remains fragile despite repeated promises of reducing dependency on Chinese products.
What is the state of domestic demand?
Financial stress is affecting the urban middle class – a key driver of consumer spending.
The real urban wage fell by 0.5% YoY during the quarter of July to September, marking the first decline since the pandemic.
The inflation rate is also high.
The October CPI was 6.21%. This is a significant drop in spending, especially on items that are discretionary like appliances and cars.
Hindustan Unilever, Maruti Suzuki and other key companies have all reported lower earnings citing a reduced demand in urban areas.
The analysts point to the subdued growth of income as being the main cause for weak consumer finances. This now poses a threat to the broader economy’s momentum.
Slow capex recovery
The pace of growth has been slow, despite the importance of public and private investment.
The government’s spending on capital intensive projects and infrastructure has been lagging behind. Only 37% of budgeted expenditures were used in the first six months of FY25.
The 49% that was spent in the same time period last year is a significant decrease.
The private corporate investment is also lacking. Businesses have been discouraged from increasing capacity by high borrowing costs and low profit margins.
What can and cannot the RBI do?
Reserve Bank of India is facing a difficult challenge.
The central bank will not cut rates at its December meeting due to the fact that inflation is still higher than target.
Many expect that measures to boost liquidity, like a decrease in the Cash Reserve Ratio or the Statutory Liquidity Ratio, will ease the pressure on the bank system.
Global trends also add to the complexity. The slowdown in the growth of major economies such as China, and United States is dampening demand from abroad for Indian products.
Can India change the tide?
India still has a lot of potential, but urgent structural reforms are needed in order to revive its economy.
By strengthening sectors such as textiles, electronics and logistics infrastructure and fixing the inefficiencies of these industries, the government can improve export competitiveness.
The backbone of our economy, small and medium businesses, needs better support. They need access to credit at affordable rates and a reduction in their dependence on imported goods.
Gleichzeitig, the policy makers must address any issues that are preventing domestic consumption.
Consumer spending has been weakened by inflation and wage stagnation. A revival of household demand will be essential for growth.
The economy could be boosted by accelerating government investment in infrastructure and industries, but the time to make meaningful changes is running out.
A fragile recovery ahead
There are signs of optimism for India’s economic future, even with the recent downturns.
A strong farming season has boosted rural consumption, while a moderated food inflation rate could boost household budgets over the next few months.
The government capex expenditure is expected to increase in the second fiscal half, providing a boost for growth.
It’s not clear whether India’s slowing economy can be reversed by these measures.
It’s possible that India has missed the chance for a resurgence in the industrial sector. India’s next growth chapter will depend on the coming quarters.
The post India’s Economy is Falling Behind? The numbers may change as the story unfolds.
This site is for entertainment only. Click here to read more
