Industry Analysis Sustaining the Economic Growth: What to Expect of India's Industry Budget?

Author / Editor: Rajabahadur V Arcot / Dominik Stephan

In undertaking the journey of India’s economic growth story, the country is treading the unique path of moving directly from agrarian society to service oriented economy without leveraging the benefits of industrialization. While this path has so far helped the country’s economy to take giant steps, moving forward, India’s manufacturing industry has to grow and expand if India is to sustain its economic growth.

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An industry analyst’s expectations from the Union Budget
An industry analyst’s expectations from the Union Budget
(Picture: PROCESS India)

The still-nascent economic expansion of India has created disposable incomes in the hands of consumers resulting in increasing consumer demand for a very broad range of products from process, batch, and discrete industries. While the process industries such as cement, steel, and power catered to meet people’s basic needs, the discrete industries such as automotive and consumer durables catered to meet the aspirational wants of the expanding middle class.

While demand-pull and not innovation provided the impetus for industrial growth, lack of innovation and competition acted as a barrier for the growth of domestic industries. Therefore, consumption and not investment largely drives India’s growth in contrast to China, which is primarily driven by investment and not consumption.

India's Industry: Dependent on Imports

In the absence of a strong domestic industrial base, India presently depends largely on imports to meet the consumer demand. Supply side constraints arising from the lack of manufacturing industry’s ability, especially the discrete industries, to meet the demand, which in turn leads to inflationary pressures, is what presently ails the country’s economy. In the case of process industrial companies, it can be said that while the production capacity exists, the industry lags behind global peers in terms of technology, productivity, and operational efficiencies.

Presently India’s import basket includes machinery and machine tools, almost the entire range of electronics ranging from integrated chips to laptops, capital equipment required by the electric power industry apart from the much needed crude oil and gas.

In the absence of a well-developed manufacturing industry, India is not able to balance its trade and therefore is becoming excessively dependent on the flow of shortterm capital flows such as funds from foreign institutional investors (FII) to bridge the current account deficit. This situation is not sustainable in the long-term and the negative impact is already beginning to manifest.