Manufacturing, Agricultural, Services Sector

#manufacturing

#agricultural

#services

Manufacturing, agriculture, services likely to sustain recovery in FY24: Economists.

India’s manufacturing, agriculture, and services sector activities are likely to sustain growth in FY24 on the back of private investments and improved high-frequency data, although headwinds of slowing exports, a global slowdown, and monsoon uncertainty may continue, economists said.

“The strong rebound in manufacturing is the cherry on top since the modest recovery in the sector was a concern for policymakers,” Rumki Majumdar, an economist with Deloitte India said. “With industry capacity utilisation rates and the government’s capex spending reaching high levels, private investments will crowd in sooner than expected. High-frequency data on credit disbursement and light diesel oil consumption also suggest higher manufacturing activity in this fiscal.”

Manufacturing, however, will face some headwinds from slowing merchandise exports. A fall in input prices will benefit it to some extent, Crisil chief economist DK Joshi said.

The manufacturing sector rebounded with growth of 4.5 percent during January-March 2023 after contracting for two quarters due to elevated input costs and low profit margins.

"Manufacturing will perform better in this fiscal due to the base effect. From the expenditure side, crowding in due to higher public spending should help increase private sector investments," Govinda Rao, economist and 14th Finance Commission member said.

"Any new investments in the manufacturing or services sector will depend on interest rates, inflation, expectations (domestic demand and global demand) and regulatory hurdles," A Sri Hari Nayudu, an economist with the National Institute of Public Finance and Policy said.

*_Agricultural growth_*

The agriculture sector, which posted growth of 4 percent in Q4, sprang a pleasant surprise on record production of wheat and mustard.

"Growth in the agriculture sector was significantly higher than historical growth. This sector has done fairly well over the past three years and growth this quarter came in stronger despite unseasonal rains in March. The upcoming monsoon season will be key to the sector’s output growth. This sector will determine the inflation path and the revival of rural demand in the coming months," Majumdar said.

However, the El Niño effect, which could adversely affect monsoon rainfall in India, could hurt growth in the agriculture sector.

“There can be some downside risk to agricultural growth, depending on the behaviour of the monsoon,” Rao said.

While the performance of agriculture will depend on how the monsoon plays out, the services sector will maintain its momentum as it is still trying to catch up, Joshi said.

*_Share of services_*

The services sector has been reviving in a sustained manner, but its share in the GDP remains lower than in pre-COVID times. Services sector growth in Q4 was led by construction, hospitality, and transport, though consumption expenditure remained muted.

That said, the contribution of services to exports has increased in importance. The global economic slowdown may have some impact on the growth of the services sector.

The overall GDP growth for FY23, at 7.2 percent, exceeded expectations, reflecting the resilience of the economy.

"However, the overall 6.5 percent GDP growth in FY24 would be achievable by India, led by strong performance of the service sector," Rao said.

Global demand is already weak and affecting exports. Hence, domestic demand needs to be strengthened. If inflation accelerates again, domestic demand will slow down further. Any major increase in the prices of food, fuel and clothing, footwear, and household goods will hamper private consumption.

The Reserve Bank of India has increased the policy repo rate by 250 basis points since May 2022 and left it unchanged at 6.5 percent in April.