Manufacturing rebounds but still trails pre-pandemic highs, warns Economic Survey

India’s manufacturing sector, while showing signs of resilience, continues to face headwinds from weakening global demand, protectionist trade policies, and domestic disruptions, according to the Economic Survey 2024–25. Slower corporate investments and sluggish recovery in key sub-sectors have dampened growth, with India’s GDP expected to expand at 6.4% in FY25—the slowest pace in four years.

The survey notes that the industrial sector grew by 6% in the first half of FY25, with Q1 posting a strong 8.3% growth. However, growth moderated in Q2 due to three primary factors: slowing manufacturing exports amid weak global demand and protectionist policies, the mixed impact of an above-average monsoon, and variations in the timing of festivities, which affected demand cycles.

"The slowdown in manufacturing exports is largely due to weaker demand from key destination countries, coupled with aggressive trade and industrial policies by major economies," the survey states. Notably, manufacturing-intensive nations such as Germany and Austria have been weighed down by weak global demand, exacerbating sluggishness in India's export-driven sectors.

The domestic manufacturing landscape presents a mixed picture. While certain sub-sectors continue to expand, others face significant challenges. Oil companies have struggled with inventory losses and declining refining margins, while steel firms have grappled with lower global prices. The cement sector, too, witnessed weak demand in Q2 due to heavy rains and lower selling prices. However, the report suggests that with the end of the monsoon season and an anticipated increase in government capital expenditure, sectors such as cement, iron, and steel are likely to see a revival.

Despite these challenges, India remains one of the fastest-growing manufacturing economies, with its Purchasing Managers' Index (PMI) in December 2024 firmly in the expansionary zone. The survey highlights that the expansion rate exceeded its long-term average, driven by robust demand, advertising efforts, and an uptick in new business orders. Additionally, international orders hit a four-month high in Q3 FY25, signaling a potential recovery in external demand.

Manufacturing firms surveyed by the Reserve Bank of India (RBI) reported improved demand conditions in Q3 FY25 and expressed optimism for further growth in Q4 FY25 and Q1 FY26. The survey pointed to better expectations regarding production, order books, employment, and capacity utilisation.

Structural Limitations

However, the report also underscores India's structural limitations in manufacturing critical goods at the scale and quality required for infrastructure and investment needs. A glaring example is the solar energy sector, where the country remains highly dependent on Chinese supply chains for key components like polysilicon, ingots, and wafers. While domestic production capacity is expected to quintuple by 2025, it still falls short of national demand. The survey warns that India's overreliance on single-source imports exposes the economy to supply chain disruptions, price volatility, and currency risks.

To overcome these challenges, the survey stresses the need for India to attract and facilitate both domestic and foreign investments. "India must go all out in promoting investment to become a competitive and innovative economy. This will not be easy, as it faces competition not just from other emerging markets but also from advanced economies looking to retain their industries at home," the report states.

The survey calls on the private sector to adopt a long-term strategic approach, focusing on supply-chain resilience rather than short-term cost considerations.