Written by Nagesh Kumar
Budget 2025-26 is presented against the backdrop of a marked slowdown in the Indian economy to 5.4% in the second quarter of 2024-25, the lowest in seven quarters, and the (GDP) growth rate forecast will be revised downward. From 2024 to 2025, it will increase from about 7% to about 6.5%. Ongoing geopolitical conflicts and the expected upheaval in Trump 2.0 trade policy are adding further uncertainty to the already stagnant decline in exports and foreign direct investment (FDI) inflows.
The main reason for the slowdown was that the growth rate of the manufacturing industry slowed from 7.0% to 2.2%. In fact, agriculture growth improved from 2.0% to 3.5% in the second quarter, while the services sector continued its strong growth at 7.1%. The slowdown in industrial activity is affecting employment sentiment.
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The slowdown in manufacturing can be attributed to trends in consumption, investment, and exports. Government consumption rebounded from an election-related tightening of -0.2% in Q1 to 4.4% growth in Q2, while private consumption spending grew 6.0% in Q2 from 7.4% in Q1. It slowed down. Fixed investment growth fell to 5.4% in the second quarter from 7.5% in the first quarter. India’s merchandise exports from April to December 2024 grew by a very modest 1.6% to $321.71 billion.
A key priority for the Finance Minister will therefore be to restore economic growth by building on the momentum of the government’s capital spending, which has begun in 2023-2024. Although institutional capacity and election-related codes of conduct have prevented the actual achievement of capital expenditures earmarked for in the budget, increased budgetary allocations for infrastructure development could lead to a concentration of private investment. will be helpful.
This budget should not only strengthen the growth engine and restore growth rates, but also accelerate growth rates from 6-7% to 7-8% range in the medium term. The importance of decent job creation requires that these engines focus on accelerating the manufacturing sector, especially labor-intensive industries.
Despite India’s natural advantages in labor-intensive sectors, shopping malls crowded with non-Indian products such as clothing, artificial flowers, glassware, tableware, and plastics make it clear that , Indian-made products are increasingly being replaced by imported products. Housewares, especially pottery, furniture, and decorative items, are often sold under Indian brand names. These fairly simple technology products have been manufactured by India’s micro, small and medium enterprises (MSMEs) and large corporations for decades. The July 2024 budget expanded production-linked incentives (PLI) to two labor-intensive sectors: leather and toys, beyond the 14 Sunrise sectors that were already eligible. This is a time when apparel and ready-made clothes are attracting attention.
Why the apparel field? Not only because apparel is one of the biggest job creators, but also because India has the best chance of success here. In addition to labor costs, India has the advantage of having a complete value chain from cotton to yarn to fabric to garments within the country. However, India has struggled among the top apparel exporters, with exports worth $18 billion and a global market share of only 3.6% in 2022. China’s exports increased more than 10 times to $182 billion, Bangladesh’s exports were $45 billion, and Vietnam’s exports were $35 billion. . Global companies currently focused on diversifying on a China+1 basis, especially in the context of President Trump’s expected high tariffs on Chinese exports (and in the context of Bangladesh facing political uncertainty) The ongoing restructuring may present a huge opportunity for India.
Various studies, including the India Industrial Development Report 2024-25 prepared by the Institute of Industrial Development, have pointed out that small scale operations in India are not optimal for the poor performance of the apparel sector. The budget may consider extending PLI, among other incentives, to encourage major companies to promote garment exports on a large scale. Many large companies, such as Aditya Birla Group, Tatas, Reliance, and Raymonds, are active in clothing retailing (often contracted out by Chinese manufacturers). There is a need to encourage localization of garment manufacturing domestically for local and export markets, as well as leveraging global partnerships to create jobs and income. If some kind of incentive like PLI helps, it would be worth it.
The budget could also address the larger issue of dumping of manufactured goods from China, from labor-intensive consumer goods to intermediate goods such as steel and machinery. In order to become the “factory of the world,” China has expanded its production capacity for all sorts of industrial products. But a growing protectionist backlash is impacting China’s ability to export to developed countries. Therefore, dumping goods into India’s booming market, where the expanding middle class is becoming an easy target, becomes a convenient option. Nikkei Asia reported that dumping from China in Southeast Asia has led to the closure of more than 2,500 factories in Thailand alone in the past year, forcing the government to take measures to protect local industry.
The threat of dumping destroying local industry, especially MSMEs and millions of jobs, is real. Governments need to act to not only protect these industries, but also develop them so they can take advantage of growing demand and create more jobs. The Budget could begin action in that direction.
The author is the director of the Industrial Development Research Institute.
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