Special Feature On Engineering Sector

The engineering industry in India serves as a vital driver of economic development and industrial growth, contributing significantly to the GDP and exports. Mandar Wagh elaborates on how India’s competitive advantages, the government’s commitment to infrastructure and manufacturing sector, and heightened capital spending will synergistically foster industry growth

The engineering sector in India holds the distinction of being the largest within the industrial landscape, serving as a critical indicator of economic development and industrial growth, effectively forming the cornerstone of any robust economy. This sector has assumed significant prominence, emerging as one of the leading contributors to the country’s Gross Domestic Product (GDP) and total merchandise exports. Moreover, it commands a substantial share, encompassing over a quarter of all factories operating in the industrial domain, and represents more than 60 per cent of the total foreign collaborations, underlining its pivotal role in India’s economic landscape. 

The engineering industry primarily consists of two key segments including engineering construction and infrastructure, as well as engineering industrial equipment. The engineering sector specialising in construction and infrastructure encompasses areas such as roads, bridges, railways, airports, power and urban infrastructure, and the manufacturing of heavy electrical equipment. The industrial equipment segment addresses a wide range of requirements across various sub-segments, including process plant equipment, earth-moving and mining equipment, printing machinery, food processing tools, textile equipment, metallurgical equipment, mouldings machinery and machine tools. India is one of the world’s largest automotive markets, and the engineering industry is deeply involved in the production of vehicles, components and automotive technology. [EasyDNNnews:PaidContentStart]
 

Market Size

The capital goods sector in India plays a substantial role – accounting for 12 per cent of the country’s manufacturing output and contributing 1.8 per cent to the overall GDP. The target production size for capital goods is projected to reach USD 112 billion by the year 2025. The electrical equipment sector stands out as the largest sub-sector, making a significant contribution of approximately 8 per cent to the manufacturing sector in terms of value and adding 1.5 per cent to the overall GDP. 

From 2021 to 2025, the industry’s growth rate is expected to accelerate at a CAGR of 9 per cent, with the electrical equipment market in India projected to grow by USD 33.74 billion to USD 70 billion. India’s automotive industry plays a pivotal role in the country’s economy, contributing 8 per cent to its total exports and accounting for 7.1 per cent of India’s GDP. It is poised for remarkable growth and is projected to become the world’s third-largest automotive market by the year 2030. 

The Indian infrastructure industry is expected to grow at a CAGR of more than 8 per cent over the next five years. Around 70 per cent of India’s projected capital expenditure on infrastructure is expected to be invested in such sectors as energy, roads, urban development and railways. As the contribution of all the major sub-sectors to the country’s GDP continues to grow, it is anticipated that together these sectors will generate direct and indirect employment opportunities that are expected to reach 5 million and 25 million, respectively, by the year 2025.
 

Engineering Stocks and Equity Markets

The Indian benchmark indices have garnered substantial attention from global investors, courtesy their impressive rally. Commencing in April 2023, during a robust corporate earnings season, this rally was further boosted by sizeable foreign investments, propelling the indices to historic highs. Notably, the BSE Sensex has recently marked its lengthiest winning streak since 2007, boasting 11 consecutive sessions of gains. The BSE Sensex and Nifty 50 indices have witnessed an impressive year-to-date surge of approximately 11 per cent, with substantial gains recorded across the majority of sectors. Notably, the BSE Industrials and BSE Capital Goods indicess have outperformed all other sectoral indices by a wide margin, posting outstanding year-to-date gains of over 40 per cent. The aforementioned sectoral indices continued their uninterrupted upward trajectory, primarily fuelled by substantial gains in railway and power infrastructure stocks, including notable performers such as K & R Rail Engineering, Rail Vikas Nigam, Ircon International, Bharat Electronics and Genus Power Infrastructures. 

Despite rail stocks already enjoying a rally due to a robust government order book and ongoing railways’ modernisation initiatives, the recent announcement of a shipping and rail transportation corridor connecting countries across the Middle East, South Asia and Europe during the G20 Summit in New Delhi has significantly heightened enthusiasm in the sector. 

Against the backdrop of fluctuating temperatures in India, which pushed electricity demand to its peak in August, power sector stocks experienced a strong rally, fuelled by increased optimism attributed to the industry’s infrastructural requirements. Bharat Heavy Electricals Ltd. (BHEL), a heavy electrical equipment manufacturer, has left investors impressed with a remarkable surge of nearly 70 per cent over the past six months, driven by optimism stemming from its consecutive receipt of significant orders. 

Patel Engineering Ltd. has emerged as the top-performing stock over the past six months, delivering exceptional returns of over 270 per cent. The company is a prominent player in the infrastructure and construction services sector in India, specialising in projects such as dams, tunnels, hydroelectric and irrigation projects, highways and railways. In August, activity within the country’s manufacturing sector reached a threemonth high, driven by a rapid increase in new orders and output. 

The S & P Global India Manufacturing Purchasing Managers’ Index (PMI) reflected the second-best improvement in the industry in almost three years. Data published by the Ministry of Statistics and Programme Implementation indicates that India’s industrial production experienced a notable uptick in July, reaching a five-month peak at 5.7 per cent. This substantial rise can be attributed to robust expansion in the mining and power sectors.
 

Outlook

The growth of the engineering industry is greatly facilitated by the policies and initiatives put forth by the Indian government. Notably, the engineering industry permits 100 per cent foreign direct investment (FDI). Acknowledging the pivotal role that the infrastructure sector plays within the broader engineering (construction) segment, the government has intensified its emphasis on infrastructure development. In the Union Budget 2023-24, it substantially increased the allocation for capital expenditure on infrastructure by 33 per cent, reaching a total of ₹ 10 lakh crore. The National Infrastructure Pipeline (NIP) is a visionary initiative designed to build high-quality infrastructure nationwide, with the overarching goal of enhancing the overall quality of life for all citizens. 

India needs to invest about USD 1.4 trillion in infrastructure over the next few years in order to reach a GDP of USD 5 trillion by 2024-25. The government has already announced a commitment to allocate ₹ 100 lakh crore towards a comprehensive range of infrastructure projects. The PM Gati Shakti National Master Plan for multimodal access to economic zones has garnered significant attention since unveiling due to its comprehensive scope. This plan integrates various aspects, including roadways, railways, agriculture, aviation and multiple ministries. Under the PM Gati Shakti initiative, the government aims to accomplish the completion of 2 lakh km of national roads by 2024-2025. 

Simultaneously, a network of multimodal logistics parks and freight cargo terminals is being established to bolster the country’s storage infrastructure, unlocking the full potential of the planned infrastructure enhancements. In the Union Budget, Finance Minister Nirmala Sitharaman announced an unprecedented capital allocation of ₹ 2.4 lakh crore for the railways, marking a remarkable increase of nine-fold compared to FY14. The railway sector is committed to expediting its construction efforts, focusing on a diverse array of projects, which will encompass the establishment of new rail lines and the expansion of existing tracks. 

As a testament to the ‘Make in India’ initiative, the Vande Bharat semi-high-speed train was inaugurated, and plans are in motion to manufacture an impressive 400 additional Vande Bharat trains by the year 2025. The government introduced the UDAN (Ude Desh ka Aam Nagrik) initiative with the aim of reducing the cost of air travel for ordinary citizens while also improving air connectivity from previously underserved airports across the nation. As part of the Revival of Un-Served and Under-Served Airports Scheme, the government has granted approval for the revitalisation and expansion of 100 airports, helipads and water aerodromes that were previously underserved or not served at all. 

When discussing power generation and transmission capabilities, it is worth noting that while the country possesses ample capacity for electricity generation, a significant portion of the population still faces challenges in accessing reliable transmission and distribution systems. The objective of the Pradhan Mantri Sahaj Bijli Har Ghar Yojana – Saubhagya is to achieve nationwide household electrification by providing last-mile connectivity and electricity connections to every unconnected household. In a bid to stimulate the manufacturing sector, the government has eased excise duties on factory gate taxes, capital goods, consumer durables and vehicles. 

In the coming years, the automotive components industry is predicted to grow at a CAGR of 8-10 per cent, achieving a value of USD 200 billion by 2026. More than 25 per cent of the industry’s output is currently exported with key markets in Europe, North America and Asia. Due to the huge number of players, India has a competitive advantage in the areas of shafts, bearings and fasteners used in automobiles, which will probably lead to greater exports in the upcoming years. The government aims to reach 30 per cent electric mobility by 2030 as well as 100 per cent domestic electric vehicle (EV) manufacture under its ‘Make in India’ initiative. 

The government has also launched numerous initiatives to encourage the production and use of electric vehicles in the country, including FAME India (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles in India) and the PLI scheme for production of automobiles and automotive components. India holds a competitive edge thanks to its abundant pool of skilled labour available at cost-effective rates, combined with its ample resources. This unique combination positions India well to narrow the potential gap between imports and exports in industry-specific machinery and equipment.

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