Whalesbook
India's Manufacturing Shift Takes Center Stage
India's economy is undergoing a major shift, moving away from its traditional IT and services dominance towards manufacturing as the main driver of future growth. Global shifts like the 'China Plus One' strategy, combined with a weakening Indian Rupee, are increasing the appeal of India's manufacturing sector. The government aims for robust 7% growth in manufacturing for FY26, up from 4.5% last year, backed by incentives like Production Linked Incentive (PLI) schemes and the 'Make in India' initiative.
Manufacturing Growth: Mixed Signals
While resilient, India's manufacturing expansion has recently cooled. The HSBC India Manufacturing PMI dropped to 53.8 in March 2026, its lowest point in 2.5 years, reflecting weaker domestic demand and market uncertainty. However, export-focused manufacturers in areas like Coimbatore and Chennai, currently trading at reasonable valuations, are viewed positively for long-term growth. Government efforts, including Free Trade Agreements (FTAs) with the UK and talks with the EU, aim to boost market access. Still, India's share of global manufacturing exports is currently modest at about 1.8%.
Consumer Spending Slows, Lending Risks Rise
This manufacturing focus poses challenges for consumer-driven sectors like FMCG and building materials, which previously relied on strong spending. While FMCG showed some growth recently, driven by rural demand, overall consumer spending may slow as white-collar job growth moderates, impacting consumer confidence. The financial sector faces increasing risk from this trend. Banks and NBFCs heavily involved in middle-class lending, particularly unsecured loans and credit cards, could see rising stress. Although overall bad loans for Indian banks hit a low of 2.15% by September 2025, the RBI anticipates impaired loan ratios to climb to about 3% in FY26, with particular concern for unsecured lending.
Rupee's Fall: Limited Export Gains
The Indian Rupee's recent slide to a record low against the US dollar offers mixed benefits for exporters. While a weaker rupee can make goods cheaper abroad, rising costs for imported raw materials and energy often offset this advantage. For industries with high import reliance, a depreciated rupee can increase production expenses. Estimates suggest only about 15% of exporters, those without currency hedges, gain directly. For the majority, the impact is only mildly positive short-term. Structural improvements, innovation, and reducing import dependency are seen as more crucial for sustained export growth than currency movements alone.
IT Sector Slowdown Contrasts Manufacturing Goals
Meanwhile, India's traditional growth driver, the IT services sector, is facing a slowdown. Nasscom forecasts revenue growth of 6.1% to $315 billion for FY26, slower than in previous years. This deceleration is linked to weaker demand and the impact of Artificial Intelligence (AI), which also creates new opportunities. Headcount growth in IT is expected to be modest, with reduced campus hiring. The 'Make in India' initiative, though attracting investment, has not yet increased manufacturing's share in GDP, which slightly declined from 16.7% to 15.9% between 2013-14 and 2023-24. Successfully leveraging 'China Plus One' will require more than just supply chain diversification.