India’s Emerging Sectors: How Finance Minister Sitharaman can outline a plan to boost India’s manufacturing output in emerging sectors in the Budget

BUDGET NEWS: A strong manufacturing sector is not only an economic engine but also a strategic lever to boost exports and foreign exchange earnings and strengthen India’s position in the global value chain. Through innovation and sectoral strategies, a thriving manufacturing industry can act as a catalyst for overall growth. Countries that have adopted this trajectory have a manufacturing share of 20%+ of their gross domestic product.

Despite reforms and initiatives, India’s manufacturing ecosystem continues to face challenges across key investment criteria resulting from low labour productivity, high logistics and energy costs, and limited innovation.

As a result, manufacturing growth lagged services. Between fiscal years 2011 and 2020, services GDP grew at a 7.7% compound annual growth rate (CAGR) compared with a 6.0% CAGR for manufacturing GDP.

However, the situation seems to be changing.

Manufacturing GDP growth is likely to register a CAGR of 9.1% over the next five years, significantly higher than the 6.9% CAGR in the services sector. This will help India increase the share of manufacturing in GDP to 20% from 17.2% in the previous fiscal. This will be achieved through a focused approach on emerging sectors such as solar photovoltaics (PV), battery manufacturing, and semiconductors. Largely led by the private sector, these sectors could see capex of Rs 5-7 lakh crore by fiscal 2028, in our view.

So what has changed?

Is this simply a result of global supply chain diversification, or are government initiatives finally bearing fruit?

The answer is not binary; it is a combination of four factors.

1) Logistics efficiency was a key focus area. India’s rise in the Logistics Performance Index from 44th in 2018 to 38th in 2023 is evidence of a range of strategic initiatives, from Bharatmala, Sagarmala and the National Infrastructure Pipeline to the e-way bill.

2) The deliberate focus on backward integration through the Production-Linked Incentive (PLI) programme and the Semiconductor Mission has been a game changer. With cumulative incentives of over Rs 2.5 lakh crore till fiscal 2030, the programme focuses on 14 sectors to strengthen the manufacturing value chain, reduce import dependency and improve competitiveness. The evolution of mobile manufacturing in India is a classic story in this regard.

3) Corporate India’s financial flexibility along with healthy profitability and a focus on domestic industrial policy will act as key enablers for investment. This, supported by deleveraged balance sheets and strong financial profiles, continues to improve corporate credit profiles as seen in the upgrade to downgrade ratio which has remained above 1 for 12 quarters.

4) This is an optimal time for India to benefit from the supply chain diversification strategies adopted by global corporations. This trend is clearly visible in sectors like semiconductors and electronics, where trade dynamics and cost competitiveness play a major role. With investment announcements of over Rs 1 lakh crore in India, there is a lot of interest in emerging sectors like chip manufacturing, semiconductor assembly outsourcing, testing, marking and packaging from global giants and large corporates.

Apart from strong political pressure, India can also learn from the growth of manufacturing in other countries. India’s export story has collapsed in the last decade due to intense competition from China, Vietnam and Bangladesh.

Timely reforms, policy pushes, trade agreements and lower production costs in developing countries have helped attract foreign direct investment and expand manufacturing, especially in key sectors such as electronics and textiles.

Another potential challenge India may face in the longer term is growing protectionism in global trade.

While government policies, investment incentives, periodic industry consultations and a favourable economic cycle have helped to achieve success so far, the government needs to ensure that this investment momentum is maintained.

This allows policy paths to be designed in a synchronous manner.

First, the flexibility of government action will be crucial, given the rapidly changing global, technological and commodity situation, given that we live in a rapidly changing world.

This requires continued emphasis on the PLI programme and encouraging the uptake of newer technologies (such as the recently announced feasibility gap funding for offshore wind projects) that will lead to the timely commissioning of domestic generation capacities in new age sectors.

Second, sustained efforts to provide long-term visibility to stakeholders in policy will be important. Given that many emerging sectors are capital intensive and have longer payback periods, stakeholders will remain vigilant for timely incentive payments and medium- to long-term policy pressure from the government. This, coupled with regular review of trade policies to monitor quality and input cost parity, should be key areas of focus for the government.

Third, through fiscal and IEBR funding, the push for infrastructure development should continue. While its multiplier effect will support demand for commodities such as steel and cement, it will also improve India’s logistics efficiency.

(Miren Lodha is Senior Research Director at CRISIL Market Intelligence & Analytics)

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