Why in the News?

The rise in the services Purchasing Managers’ Index (PMI) to 59 in February has brought relief to investors and policymakers.

What is the significance of the sharp rise in the services Purchasing Managers’ Index (PMI)?

• Indicator of Economic Expansion: A PMI reading above 50 signifies sectoral growth. The rise to 59 in February reflects a strong rebound in the services sector. Example: Increased demand for financial services and hospitality indicates higher consumer spending and business confidence.
• Boost to Investor Confidence: A higher PMI suggests a positive business environment, encouraging domestic and foreign investments. Example: Global investors may increase FDI in India’s technology and telecommunication sectors due to sustained growth signals.
• Job Creation and Income Growth: Growth in the services sector leads to higher employment opportunities and better wages. Example: The rise in IT services and healthcare sectors can create new jobs in software development and medical support.
• Balancing Manufacturing Weakness: A strong services PMI can offset slowdowns in manufacturing, ensuring overall economic stability. Example: Despite the manufacturing PMI falling to a 14-month low, growth in financial services has maintained economic resilience.
• Improved Fiscal Outlook: Higher activity in services increases tax revenues, improving the government’s ability to fund infrastructure and social programs. Example: Growth in e-commerce and logistics boosts GST collections, strengthening public finances.

Which major challenges do India’s services and manufacturing sectors face according to industry leaders and NASSCOM’s 2025 Strategic Review report?

• Technological Disruption from Artificial Intelligence (AI): AI-driven solutions are transforming traditional business models, reducing revenue from new contracts, and reshaping hiring and training practices. Example: Automation in IT services is reducing the need for entry-level jobs, impacting employment growth.
• Global Protectionism and Rising Tariffs: Increasing reciprocal tariffs and trade barriers, particularly from major economies like the United States, pose a threat to export-oriented industries. Example: U.S. tariffs on Indian textiles and pharmaceuticals may reduce market competitiveness and profit margins.
• Slowdown in IT Sector Growth: India’s IT sector growth is expected to be 5.1% in FY25, a decline from its historical 16% CAGR, due to reduced demand and shifting client priorities. Example: Major IT firms report fewer large-scale outsourcing contracts as clients adopt in-house AI solutions.
• Geopolitical Uncertainty: Geopolitical tensions and supply chain disruptions increase business risks and operational costs. Example: Disruptions in the Red Sea trade route affect electronics and automotive supply chains.
• Potential U.S. Recession Risk: A U.S. economic slowdown could reduce export demand, significantly impacting both manufacturing and services, as the U.S. is India’s largest trading partner. Example: A U.S. recession may lead to fewer orders for Indian IT services, pharmaceuticals, and automotive components.

How could the reciprocal tariffs announced by the U.S. impact India’s manufacturing sector?

• Reduced Export Competitiveness: Higher import duties on Indian goods will increase prices in the U.S. market, making Indian products less competitive against local and other global manufacturers. Example: Indian textile exports to the U.S. could decline as higher tariffs make them more expensive compared to those from Vietnam or Bangladesh.
• Disruption of Supply Chains: Tariff barriers may affect cross-border supply chains, increasing production costs and causing delays in delivery. Example: Indian automotive components exported to U.S. manufacturers may face disruptions, affecting just-in-time production systems.
• Reduced Investment and Market Access: Tariffs create uncertainty, discouraging foreign direct investment (FDI) and limiting India’s access to the lucrative U.S. market. Example: Electronics manufacturers considering India as a production hub may shift investments to low-tariff countries to maintain U.S. market access.

Way forward: 

• Diversify Export Markets: Strengthen trade ties with emerging economies (e.g., Africa, Southeast Asia) and regional blocs to reduce dependence on the U.S. market.
• Enhance Domestic Manufacturing Competitiveness: Promote Make in India, invest in advanced technologies, and offer export incentives to reduce costs and improve global market access.

Mains PYQ:

Q Do you agree that the Indian economy has recently experienced V-shaped recovery? Give reasons in support of your answer.  (UPSC IAS/2021)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now