Contraction in the manufacturing sector signals stress in Asia’s third-largest economy, economists warn, after growth slowed in the second quarter amid rising prices and higher borrowing costs. India’s gross domestic product grew at 6.3% in the July-September period, less than half of the preceding quarter’s 13.5%. But it is a sharp fall in the manufacturing sector, which contributes nearly 16% to India’s GDP, that has raised alarm bells.
“We see signs of stress – ongoing and more to come,” said HDFC Bank Ltd. economists led by Abheek Barua. Pressure on corporate profitability due to elevated costs and lower exports weighed on production, he said, adding that a slowdown in domestic consumption is another worry.
Weak manufacturing activity plays against the Narendra Modi-led government’s efforts to attract global industrial houses to set up units in India and diversify away from China. The South Asian nation is poised to attract a large share of foreign investments, particularly in the electronics sector, and policies in the next few years should be geared toward that objective, Goldman Sachs Group said in a recent note.
“There have been certain laggards, particularly factory activity, that have been disappointing,” Upasna Bhardwaj, an economist with Kotak Mahindra Bank Ltd., said in an interview Thursday with Bloomberg Television’s Haslinda Amin and Rishaad Salamat. “India needs to push harder to bring manufacturing activity at par with the globe,” she said.
India’s growth cycle has most likely pivoted, Nomura Holdings Inc. economists Sonal Varma and Aurodeep Nandi wrote. They said consumption remains worryingly K-shaped, rural wage growth has now stalled, and consumer optimism is lower than pre-pandemic levels. That means the “growth rate cycle has peaked and a broad-based slowdown is underway,” they wrote.
Nomura economists forecast growth of 4.7% in 2023, and 5.2% for the fiscal year ending in March 2024. Those figures are sharply below the roughly 7% growth rate expected for the current fiscal year.