The survey says that capacity utilisation in the manufacturing sector has been rising, which would auger well for new investment activity in generating additional capacity
Strong domestic demand is expected to steadily help in growth of India’s industrial output in the next financial year, according to the Economic Survey 2022-23. Easing of input cost pressures as international commodity prices see correction would bode well for company margins.
The survey says that capacity utilisation in the manufacturing sector has been rising, which would auger well for new investment activity in generating additional capacity. “Credit growth in the industry has also increased remarkably, suggesting that prospects for capex (capital expenditure) investments by companies are brighter. The PLI (production-linked incentive) schemes are set to unlock manufacturing capacity, boost exports, reduce import dependence and lead to job creation for both skilled and unskilled labour,” the survey says.
The survey, authored by chief economic adviser V Aanantha Nageswaran, says that though global headwinds remained, industrial production expanded during FY23 because of sustained demand conditions. Bank credit has grown at the same pace as industrial growth, and a sequential surge was evident since January last year. MSME credit significantly increased because of the introduction of the Emergency Credit Line Guarantee Scheme (ECLGS). Foreign direct investment (FDI) in the manufacturing moderated in the first half of FY23 due to increased global uncertainties, but inflows managed to remain significantly above the pre-pandemic levels, aided by structural reforms and improvement in the ease of doing business.
“The electronics industry continues to ascend in importance as its applications become pervasive. Electronics, supported by continuously improving communication services, will significantly enhance productivity, efficient service delivery, and social transformation. This industry’s significant growth drivers are mobile phones, consumer electronics, and industrial electronics. In the mobile phone segment, India has become the second-largest mobile phone manufacturer globally, with the production of handsets going up from 6 crore units in FY15 to 29 crore units in FY21,” the survey says.
It also says that the performance of pharmaceutical exports has been robust. The sector managed to sustain positive growth despite the global trade disruptions and a reduction in demand for Covid-19-related treatments. The cumulative FDI in the pharma sector crossed the $20 billion mark by September 2022.
The survey says that the pandemic and the Russia-Ukraine war disrupted supply chains, forcing companies to rethink their supply chain strategies and that would offer India an unique opportunity to become a global manufacturing hub in this decade. “In this context, the government’s Make-in-India initiative has facilitated investment, fostered innovation and built world-class infrastructure while addressing the gaps in domestic manufacturing capabilities. The Production Linked Incentive (PLI) schemes across 14 categories has further complemented it with an estimated Capex of around ₹3 lakh crore over the next five years and the potential to generate over 60 lakh jobs. In the medium term, the scheme will help reduce net imports by building domestic manufacturing capacity that will cater to domestic and global needs,” the survey says.
The survey says that increase in investment demand has been triggered by a jump in central government expenditure in the current and the previous year, compared to the pre-pandemic years. Increase in government expenditure has crowded-in private investment, which was already upbeat on export stimulus, pent-up consumption demand, and strengthening of the corporate balance sheets. “Capacity utilisation at 74.3 per cent in Q1 of FY23 has already reached the tipping point of 75.3 per cent in Q4 of FY22, at which investments in building new capacities are undertaken. New investment announced in the manufacturing sector during April-December of FY23 was five times the corresponding level in FY20. The surge in investment is also attributable to the policy actions taken by the Government over the past several years. A beginning has been made in H1 of FY23, which recorded the highest share of Gross Fixed Capital Formation (GFCF) in GDP among all half-years since FY15,” the survey says.
However, it also said that on the downside, exports are witnessing a slowdown and is expected to moderate due to probable global economic slowdown. Industrial growth might get adversely impacted by volatile international commodity prices and supply disruptions in raw materials due to new global disruptions. “The re-emergence of Covid-19 in China can trigger supply chain disruptions, as was the case during the pandemic period. On the other hand, if China returns to normalcy from Covid-19, there can be an increase in commodity demand - thus reversing the recent decline in commodity prices. Of course, the strength and duration of the recovery in commodity prices will be a function of many factors, such as the pace of China’s economic recovery and growth outlook in North America and Europe,” the survey said.