Budget presents an opportunity to drive Viksit Bharat's manufacturing-led expansion

Budget Expectations: FY25 has begun on a good note for Indian manufacturing. According to the Reserve Bank of India, capacity utilisation in manufacturing rose to 76.5% in Q4 of 2023-24 from 74.7% in the preceding quarter, reaching well above the long-term average of 73.8%. Moreover, the contribution of high-end manufacturing exports to GDP improved during FY24. For example, India’s electronics exports increased 23.6% to US$29.12 billion in FY24.

The FY25 Budget presents the government with a salient opportunity to help the nation continue driving its manufacturing-led-expansion of GDP and exports. We recommend four action areas.

Budget: Enhancing the reach and quality of infrastructure

The Government has made commendable progress in building physical infrastructure towards facilitating growth in manufacturing. It can be further augmented by enhancing the reach and quality of the infrastructure. For example, the Government’s stated goal to reduce the logistics cost to 5-6% of the GDP will significantly enhance the competitiveness of exports and the economy.

In the forthcoming Budget, the Government may consider setting up the Infrastructure Quality Commission at par with other regulatory commissions in India—to monitor and assess quality as well as reach issues associated with manufacturing infrastructure. This will help in building the Make in India brand globally.

Budget: Building the workforce for the future

The shortage of skilled manufacturing labour, largely across cross factories, engineering units, manufacturing plants and assembly lines, is well known.

While past budgets have continued laying emphasis on skilling at scale through various missions, it’s time for the private sector to also do its bit. Towards helping them do so, the Government can announce the Productivity-Skills Linked Incentive scheme. Under this scheme, companies showcasing growth in total productivity over a period of three years resulting from enhancement of workforce skills may be rewarded with a tax concession at the end of the three-year journey.

A recent PwC survey indicates that 77% of workers say that they are ready to learn new skills or completely retrain and 74% see upskilling as a matter of personal responsibility. This interest within the workforce must be tapped through delivering soft and hard vocational skills with a digital edge. The Ministry of Skill Development and Entrepreneurship may issue guidelines encouraging public and private skilling agencies to integrate GenAI-enabled curriculum towards making existing coursework on vocational skills more customized and interactive in regional languages.

Budget: Promoting assembly goods exports

Competitive scaling of employment intensive assembly-goods exports requires availability of low-cost components/raw materials close to the location of the assembling exporter.

The Government can consider allowing entities supplying components to these manufacturers to import, store and supply inventory without creating a taxable presence. This will enable assembly-goods exporters in India to access state-of-the-art inputs, moulds, granules, etc., at competitive prices, enabling them to substantially increase exports.

Budget: Supporting innovation and ESG compliance

Global climate mitigation initiatives have accelerated in the last 10 years. Initiatives such as the European Union (EU) Corporate Sustainability Due Diligence Directive (CSDDD) and Carbon Border Adjustment Mechanism (CBAM) mandate firms to ensure sustainable practices throughout their supply chain and carbon emission reporting.

Companies exporting to markets such as the EU must therefore invest in energy-efficient technologies, renewable energy, and production-process optimization to minimize waste and emissions. Such innovations will require investment and incur sunk costs—which manufacturing exporters may not be able to pass on to their consumers, as that would result in losing market share.

The Government, on lines of the Production Linked Incentive (PLI) scheme, can initiate a De-carbonization Linked Incentive scheme for manufacturers. For example, suitable WTO-compliant direct tax benefits can be awarded to manufacturers based on their progress in suitably de-carbonizing their production process and/or supply chains over 3-5 years.

Let’s recognize that manufacturing (export) is key to realizing the dream of a VIKSIT Bharat and the FY25 Budget must propel the sector in that direction.

(The author is partner and advisory leader at PwC India)