Capex Revival To Boost Manufacturing Over The Next Decade

India's manufacturing sector is poised for significant growth over the next decade, driven by a revival in capital expenditure (capex) and infrastructural advancements. The sector is expected to triple in market size, reaching USD 1.66 trillion by the fiscal year 2034 from its current USD 459 billion in FY24. This growth trajectory surpasses the average annual increase of USD 175 billion observed over the past decade. Consequently, the manufacturing sector's share of GDP is anticipated to rise from 14 per cent in FY24 to 21 per cent by FY34, supported by reduced logistics costs and enhanced infrastructure.

Investments in infrastructure are projected to climb from 33 per cent of GDP in FY24 to 36 per cent by FY29, creating a positive ripple effect across the economy. Industry capacity utilisation has already reached 75 per cent, with the leading three steel producers operating at over 90 per cent capacity, according to the Reserve Bank of India's survey. This trend signals a rising demand for key commodities such as steel, cement, and aluminium, as infrastructure projects gain traction.

To prevent potential obstacles like inflation spikes or project delays, sectors must scale up their capacities. The power sector, in particular, faces increasing capital expenditure needs due to growing electricity demand from data centres, manufacturing incentives, electric vehicle adoption, and heightened air conditioner usage.

DSP Mutual Fund projects significant capital expenditure through India's Production Linked Incentive (PLI) Scheme, expecting around USD 39 billion in investments between FY24 and FY26. While current PLI investments focus on pharmaceuticals, mobile phones, and solar PV modules, emerging sectors like semiconductors, specialty steel, textiles, and automobiles are set to see increased investment in FY25. Sectors such as Power, Defense, Water, and Manufacturing are primarily driven by demand rather than policy push.

"Manufacturing as a percentage of GDP is at 14 per cent for India, whereas for other Asian countries, it is much higher at over 20 per cent. We remain optimistic about the manufacturing sector, as we believe many segments are on the verge of significant demand growth, driving earnings growth for companies. We are witnessing companies adding capacities to meet increased demand, as supply has not kept pace," said Charanjit Singh, Fund Manager at DSP Mutual Fund.

"The last five years have focused on key reforms and policy changes by the government. We believe that the period from FY 25-30 will be about execution. Additionally, private capex, which has been weak for a long time, could see a revival from FY26, led by rising utilisation levels, strong corporate balance sheets, and political stability," Singh added.

India's manufacturing sector stands at the cusp of a transformative decade, with strategic investments and policy support driving its growth and contribution to the nation's GDP.