The evolution of Indian manufacturing as an investment theme

India aims to raise its share of manufacturing to 25% of GDP, from about 17%. (Mint)
India aims to raise its share of manufacturing to 25% of GDP, from about 17%. (Mint)


The outperformance of the sector not only alludes to the growing recognition among investors of manufacturing as a key theme, but also hints at strong buying interest

While India's benchmark indices have hogged the headlines for scaling new peaks, and small- and midcap indices for their frothy valuations, one segment of the market has quietly outshone them all—manufacturing.

The sector, in fact, is thriving, bolstered by increased investments and the Union government's push for indigenous production with its ‘Make in India’ drive and production-linked incentive schemes. 

This has borne out in the stock markets as well. The Nifty India Manufacturing index has surged an impressive 14% so far this year, eclipsing the benchmark Nifty 50 and broader market indices. The Nifty Midcap 100 and the Nifty Smallcap 250 have risen by about 8% each this year, while the Nifty 50 has gained 4-5%.

The outperformance not only alludes to the growing recognition among investors of manufacturing as a key theme, but also points to early evidence of India developing into a global manufacturing hub. While the country has outshone in the services sector, especially in information technology, India's manufacturing industry has lagged thus far.

India aims to raise its share of manufacturing to 25% of GDP by 2047, from about 17% currently. Manufacturing exports hit a record high of $447.46 billion in FY23, a 6.03% increase from $422 billion in FY22, reflecting the underlying momentum.

Vipul Bhowar, director, listed investments, Waterfield Advisors, said initiatives such as 'Make in India' and PLIs have played a crucial role in fostering a favourable business environment, encouraging investments, and promoting indigenous manufacturing. 

“The sector's growth is evident, focusing on key industries such as chemicals, pharmaceuticals, electronics, automotive, industrial machinery, and textiles," Bhowar said.

In the interim Union budget for 2024-25, the government increased the allocation for production-linked incentive schemes to 6,200 crore from 4,645 crore in 2023-24 (budget estimate). 

Similarly, the allocation for the Modified Programme for Development of Semiconductors and display manufacturing ecosystem was more than doubled to 6,903 crore for 2024-25 (BE) from 3,000 crore in 2023-24 (BE). Other schemes such as solar power (grid) and national green hydrogen mission also received significantly higher budgetary allocations.

A focus on policy continuity following the general election in April-May would bolster economic and business sentiment and buttress a much-anticipated recovery in private capital expenditure on infrastructure and manufacturing, say experts. 

Besides, the industry also expects further progress in supply-side reforms, including clean energy transition, increased focus on local manufacturing, and targeted policies for youth, the poor, women, and farmers.

“During a potential third term for (Prime Minister Narendra) Modi, we would expect further progress towards digitalisation and continued policy push toward manufacturing/exports, given India's increasing footprint in global value chains," analysts of UBS Securities India said in a report dated 18 March.

All said, manufacturing relies heavily on well-functioning infrastructure, and to ramp up activity in the sector India will need to focus on increasing productivity by scaling up infrastructure, ensuring fewer power outages, and avoiding below-par transport infrastructure.

“This (poor infrastructure) has kept the size of the manufacturing firms small, making it difficult to exploit economies of scale," Bhowar pointed out. “Land acquisition is also a challenge."

Given the infra push, the Indian government has initiated three railway corridor programmes to enhance logistics and cut costs. It also seeks to attract foreign investment via bilateral treaties and to upgrade airports while building new ones. Additionally, it's focusing on urban development by expanding metro rail networks.

That said, India's limited correlation with developed markets, combined with an expected GDP growth of at least 6% in the upcoming five years, presents a compelling case for increasing investment exposure to the country, said BlackRock in its February newsletter. 

It added that India, which is currently among the fastest-growing economies, is on a trajectory to become the world’s third-largest economy by 2027, surpassing Japan and Germany. 

“Historically, global investors have gained access predominantly through equities, with Indian stocks concluding 2023 on a record eight-year winning streak," BlackRock said.

According to Thomas Taw, vice president and head of investment strategy, EII APAC, BlackRock, “Despite concerns over Indian equities’ lofty valuations, investors are becoming more convinced of India’s longer-term growth potential". 

India's weight in the widely tracked MSCI Emerging Markets Index has doubled to 17% from December 2019 to December 2023. Moreover, India's inflation gap with the US and other developed countries has decreased, the rupee has remained relatively stable against other emerging market currencies, and India's foreign exchange reserves look healthy. 

What’s more is that the inclusion of Indian bonds into the JPMorgan GBI-EM Global Diversified Index in June will provide a new channel for global investment.

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