Manufacturing momentum: Will India stay the course post Budget 2024?

India's manufacturing is on fire. The Nifty India Manufacturing index has soared 60% in just a year, dwarfing the 26% gains in the benchmark Nifty50. This investor enthusiasm reflects a growing belief that India can become a global manufacturing hub, capitalizing on the trend of supply chain diversification.

Supporting this optimism is the HSBC final India Manufacturing Purchasing Managers Index, which has consistently remained above its long-run average and the crucial 50-mark, separating contraction from expansion, for nearly three years now.

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However, with the Bharatiya Janata Party (BJP) returning to the Centre through a coalition government, a crucial question has arisen: Will manufacturing remain a top priority?

Budget tightrope walk: Capex vs welfare spending

Market participants are pondering the implications of the BJP's narrower-than-anticipated majority in the 2024 general election. Some analysts anticipate a shift in the upcoming budget, with a potential easing on fiscal consolidation and a pivot towards social spending.

According to a Goldman Sachs report dated 8 July, there is a rising expectation that India’s Union Budget for FY25 might ease the fiscal consolidation path and pivot towards welfare spending from capital expenditure (capex).

"There is a possibility of some welfare measures from the government, in addition to manufacturing and capital expenditure themes going forward," said Varun Saboo, head of equities at Anand Rathi Shares & Stock Brokers.

Despite this, the report notes that infrastructure upgrades have created long-term growth spillovers that policymakers are unlikely to abandon.

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Consequently, the consensus is that manufacturing and infrastructure will remain in the spotlight, driven by their job creation potential, the Atmanirbhar Bharat initiative, their role as GDP drivers, and the necessity to modernize India's infrastructure.

“We think the golden run of manufacturing companies will continue, led by the coordinated policy push and the global trend of supply-chain diversification,” Madhavi Arora, lead economist at Emkay Global Financial Services, emphasized.

Vision and economic impact

Manufacturing contributes 17% to India’s GDP and employs over 27.3 million workers. Prime Minister Modi’s Viksit Bharat 2047 vision aims to elevate India into a $30 trillion economy, increasing manufacturing’s GDP share to 25%, creating 100 million jobs, reducing logistics costs, and doubling female workforce participation.

“The focus of the NDA (National Democratic Alliance) government has consistently been on capex spending as a matter of ideology to drive growth through supply side measures,” said Garima Kapoor, executive vice president economist at Elara Capital.

She anticipates continued capex focus, particularly in infrastructure and manufacturing, while also expecting increased rural development and agriculture allocations.

Investment in manufacturing-related ministries has surged, with spending rising to ₹7.09 trillion in FY24 from ₹2.58 trillion in FY20 and ₹1.41 trillion in FY15. Kapoor expects this amount to grow significantly as PLI schemes for auto, semiconductors, medical devices, drones, white goods, and computer hardware gain traction.

Aniruddha Naha, chief investment officer – Alternatives at PGIM India Asset Management, noted, “Infra will require the government to spend whereas manufacturing would sustain from private participation, as the government has already incentivized this segment through PLI schemes.”

Having said that, the focus on manufacturing does not need to be limited to budget allocations, according to Arora of Emkay Global. Policy support, she said, will be needed to boost sophistication and innovation in product manufacturing to attract manufacturing investment and reduce product dependence on China.

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Karthikraj Lakshmanan, senior vice president and fund manager of equity at UTI AMC, noted that the government’s focus on reducing the fiscal deficit might result in more measured capex growth. Consequently, the private sector is expected to play a more significant role.

He emphasized that strong macroeconomic fundamentals coupled with robust bank balance sheets and de-levered corporate balance sheets provide the ideal environment for accelerating private capital expenditure.

“We believe most of the big structural reforms are now behind us and the time gap between the election results and budget is relatively short to present a fully fleshed out scheme," cautioned Akhil Chaturvedi, Chief Business Officer & Executive Director at Motilal Oswal AMC. Consequently, his expectations for major new initiatives are low.

Sectors in the spotlight

Capital goods, including defence and railways, housing, tourism, and aviation are likely direct beneficiaries of budget allocations, while textiles and pharma API are probable winners.

Dhiraj Relli, managing director and chief executive, HDFC Securities, suggests that the GST rate of 28% may be reviewed to reduce infrastructure costs. Measures to popularize municipal bonds for financing urban infrastructure projects could also be announced.

Efforts to reduce the cost of renewable energy equipment and components might also be on the agenda. Given the previous extension of production-linked incentive (PLI) schemes to various sectors, similar extensions are anticipated to enhance manufacturing depth. Additionally, incentives for component manufacturing, electric vehicles, and other sectors are likely to follow.

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In addition to focusing on infrastructure, manufacturing, affordable housing, digital innovation, and green energy, Janakiraman R, chief investment officer for Emerging Markets Equity - India at Franklin Templeton, belives that the upcoming budget might see a moderate increase in welfare spending, potentially boosting rural consumption and related sectors.

Goldman Sachs sees a sustained emphasis on job creation through labour-intensive manufacturing, credit for MSMEs, services exports, and domestic food supply chain management to control price volatility. As India continues to leverage its manufacturing potential, the sector is set to remain a cornerstone of the nation's economic strategy, driving sustainable growth and development.