OPINION | India’s consumption boom must power its manufacturing future

Manufacturing leads to higher labour productivity, which is the key to creating well-paying jobs.

The GST rate rationalisation has been excellent news for consumers this Diwali. Critical consumer purchases such as cars and FMCG goods have received an effective 7–12% price cut. Early retail readouts suggest a broad-based consumption bump across autos, FMCG, apparel, and electronics, among other sectors.

This exuberance comes against the backdrop of India’s large household consumption, at about $2.4 trillion. This year’s GST cut should support above-trend growth—soon placing India’s household consumption as the third largest globally (after the US and China).

Why Exports Can No Longer Drive India’s Growth

This makes India’s consumption arguably the single most important driver of its industrialisation in the next decade—especially since exports are not going to be the demand engine they were for East Asian economies. Three key factors explain this shift.

First, rising American protectionism has steadily soured the USA as a market for India — and America has been the chief source of demand for global manufacturing. With its extreme focus on re-shoring as much production as possible, the Trump administration is in no mood to let India follow in the coattails of China’s export success with the USA. Even when the 50% tariff on India recedes in the hopes of a trade deal this fall, a generally higher-than-average tariff rate is expected to remain.

Second, Chinese overcapacity makes the presence of a “second China” untenable. For instance, China has an installed capacity to make more than 55 million cars a year, while domestic sales stand at 28–30 million annually. They already have enough capacity to service the world. The gigantic economies of scale that come with such capacities mean that the price advantage will always lie with the Chinese. Similar excesses exist in batteries, solar panels, and other sectors.

Third, Indian democracy prioritises consumption boosts through welfare schemes due to electoral pressures. The recent spate of cash transfer schemes such as the Ladli Behna Yojana is the latest in a long line of freebies that the Indian state routinely doles out to its citizens. This contrasts with China, where its totalitarian character can suppress domestic consumption to raise investment rates and power export growth.

So, are we using India’s consumption to fuel Indian production?

The Trouble with India’s Trade Deficits

Not quite. This Diwali also highlighted the unfortunate state of Indian trade. Between April and September of FY26, India racked up a total goods trade deficit of over $154 billion — of which $54 billion was with China. This suggests that in FY26, India’s merchandise trade deficit is likely to outpace FY25’s figure of $282.83 billion. With China in particular, we buy more than seven times what we sell to them.

India also consistently runs trade deficits with ASEAN, South Korea, and Japan. As a result, a large share of domestic consumption “leaks” into imports, diluting manufacturing multipliers at home.

Building Guardrails for Self-Reliant Growth

First, pursue rigorous import substitution in categories where Indian industry can manufacture competitively. In such cases, policy should help Indian industry capture more than 90% of the domestic market. A good example is toy manufacturing, where reliance on imports was cut by 80% between 2019 and 2024 when the government drastically raised import duties to push domestic production.

Second, double down on PLI and other mission-oriented schemes for products where import dependence is extreme. These include ships, semiconductors, EV batteries, inputs for solar module manufacturing, and electronic component manufacturing for smartphone assembly plants. Programmes such as the India Semiconductor Mission and the PLI schemes for EV batteries are steps in the right direction. These should be scaled and sequenced to push local value addition, not limited merely to promoting assembly.

Third, India’s FTA strategy needs to focus on compatible trade partners that help our manufacturers, not hurt them. FTAs with ASEAN and East Asian countries — given the state-capitalist nature of Vietnam, Japan, Korea, and China — necessarily result in massive deficits for India, as our industrial policy mechanisms are not as efficient as theirs. These FTAs need to be pruned and replaced with agreements involving regions where Indian exports are likely to rise. The India–United Kingdom FTA is a step in the right direction, as it is likely to open markets for our manufacturers rather than impede our industrialisation.

Turning Consumption into National Strength

Without broad-based manufacturing growth of the kind East Asia has seen in the past three decades — or the West saw almost a century ago — the rise of India as a great power is simply not possible. Manufacturing leads to higher labour productivity, which is the key to creating well-paying jobs. It also generates demand for services and, most importantly, builds national strength. The country that makes more cars will always build more tanks.

With a souring international context and receding world trade, India’s own consumption can power its manufacturing sector — if the right guardrails are attached to it.

(Akshat Khandelwal is a writer, and the Founder & CEO of Nuflower.)

Views are personal, and do not represent the stand of this publication.