The Manufacturing Sector: Growth Story of India

The Reserve Bank of India’s manufacturing capacity utilization is an important parameter to ascertain the period for capacity augmentation by manufacturers. Typically, a capacity utilization of 75 or above indicates reasonably healthy demand for domestic manufacturing firms. Any signal towards a further rise in capacity utilization is a trigger for initiating capital spending for capacity expansion by manufacturers. During the pandemic years, the manufacturing capacity utilization rates in India had fallen below 70 and there was hardly any incentive for further capacity expansion. However, this number has already reached pre-pandemic levels as of 2022 with latest readings suggesting it could soon reach/breach 75 levels.

An ICRA (a Moody’s Investors company) report of Nov-2022 on PLI for manufacturing revealed that the share of this sector in overall capital expenditure, or capacity building, has surged from an average of 24% in the pre-PLI years (FY2015-19 period) to an average of 44% in the post-PLI period (FY2021-22), with the last fiscal reading for FY22 recorded at 49%.

MANUFACTURING SHARE IN INDIA’S TOTAL CAPEX

(4-quarter rolling average) MANUFACTURING CAPACITY UTILISATION IN INDIA

60%

49%

50%

80.0

75.0

40%

70.0

Post-PLI spike in Manufacturing CAPEX

30%

65.0

Period between two major lockdowns

20%

60.0

10%

55.0

PLI SCHEME INTRODUCED

50.0

0%

2014-15

2015-16 2016-17

2017-18

2018-19 2019-20 2020-21

2021-22

Q2 - FY17

Q2 - FY21

Q2 - FY15

Q2 - FY18

Q2 - FY16

Q2 - FY19

Q4 - FY17

Q2 - FY14

Q4 - FY21

Q4 - FY15

Q4 - FY18

Q4 - FY16

Q4 - FY19

Q4 - FY14

Q2 - FY22

Q2 - FY23

Q4 - FY22

Q2 - FY20

Q4 - FY20

Source: ICRA PLI report press release, Nov-22

RBI OBICUS survey, April-2023

PLI is now poised for rapid on-the-ground execution, with a large share of the capex already approved and major spending set to occur over FY24-FY26. As per the ICRA report, the deployment of capex may kick-off in a big way over this fiscal year 2023-24, with investments likely to cross the INR one lakh crore threshold and may touch 1.7 lakh crore in FY26. The Government is also contemplating launching PLI schemes for a few more sectors (containers, electrolysers, power transmission equipment, etc.) to ensure manufacturing CAPEX continues to remain elevated beyond FY26.

Interestingly, as per a FICCI March-23 survey of 400 Indian manufacturing firms, suggests many sub segments within manufacturing such as Petrochemicals, Fertilizers, Textiles, Auto, Electronics etc. have already breached the average capacity utilization levels and have even reached a tight capacity phase where additional CAPEX is crucial to meet future demand. The survey report suggests that ~47% of respondents have reported plans for making investments and expansions in the coming six months or so to meet the pressing need for capacity augmentation, with 32% of respondents even expressing their intention to hire additional workforce in the coming months.

Expected capex (Rs trillion) EXPECTED RISE IN CAPEX DRIVEN BY PLI SCHEMES

REMARK

MANUFACTURNG SUB-SEGMENT Paper Products Petrochemicals and Fertilisers Textile Machinery Capital Goods Auto and Auto components Electronics Cement Miscellaneous Textiles Chemicals and Pharma Metals and Metal Products Machine Tools

AVERAGE CAPACITY UTILISATION (CU)

95% 95% 85% 81% 80% 79% 75% 74% 73% 67% 67% 65%

1.5-1.7

TIGHT CAPACITIES

1.2-1.4

0.9-1.1

ABOVE AVERAGE CU

0.2-0.4

MODERATE CU

FY23

FY24

FY25

FY26

Source: FICCI Quarterly Survey on Indian Manufacturing Sector, Mar-2023

Source: ICRA PLI report press release, Nov-22

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The Manufacturing Sector Growth Story of India

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