India’s manufacturing and services sector growth continues to hit lows amid falling demand and poor wage rises. Manufacturing remains low around 14% while it needs base around 25–30% of GDP. A country with such a huge population needed mass job creation outside agriculture and informal work. Instead, too many workers remain stuck in low-paying jobs with limited opportunities. A stronger manufacturing sector could have absorbed rural workers, boosted exports, increased incomes, and reduced pressure on agriculture.
India’s labour-intensive manufacturing sector—including textiles, apparel, leather, footwear and wood products—continues to underperform, while even basic metals and capital goods face cyclical slowdowns. The key constraints are high logistics costs, weak R&D, limited access to affordable credit for MSMEs, and persistent supply-chain bottlenecks. These structural weaknesses have reduced global competitiveness, slowed job creation and prevented manufacturing from becoming the broad-based engine of growth needed to absorb India’s expanding workforce. This indicates that overall demand deficiency is bogging the manufacturing growth.
The seasonally adjusted HSBC India Services PMI Business Activity Index – based on a single question asking how the level of business activity compares with the situation the month before – remained above the neutral mark of 50 and therefore signalled another expansion in output. At 53.4 of PMI in July, the lowest since August 2021, it simply means demand contraction has put down sales as the pace of growth has hit its slowest rate in nearly five years.
New business growth slowed to its weakest pace since February 2022, amid intense competition, softer demand and postponed orders. Job creation improved modestly in July after hitting a six-month low in June, but only 6% of firms increased payrolls while 92% reported no change. Meanwhile, input costs continued to rise, driven by higher fuel, labour, materials, technology and transportation expenses.
Former Chief Economic Advisor, Arvind Subramanian, in one of his recent observations drew a distinction between the wages in the private sector and the public sector. The PSU wages are fixed to neutralise the inflationary aspect and keep it at a realistic level. The private sector on the contrary despite earning 16-17% to 45% profits has been miser in sharing the profits. The low wages create not only an artificial wedge but also hit the market. The purchasing power of the working class remains low. This does not create the required demand. This turns into a disincentive for the goods produced as the workers lack the capacity to buy.
A slowdown or loss in India’s manufacturing sector directly reduces credit demand and increases stress on micro, small, and medium enterprise (MSME) loan portfolios. Interest Coverage Ratio (ICR) data of the RBI showed that the ICR for manufacturing companies dropped to 7.6 in the December quarter, falling 30 basis points due to lower earnings. (ICR measures a company’s ability to pay interest on its debts using operating earnings.)
Higher raw material expenses have occasionally squeezed profit margins, making debt repayment tighter for select mid-sized manufacturing units. Interestingly, it is just not manufacturing, the IT sector is also contracting. India’s IT sector is slowing due to weaker global demand, particularly from the US and Europe.
The country has to look deeper, work out industrial and banking policies for revving up the economy and its global standing.
INFA