Inflation print for the past two months suggests India has passed its inflation peak – Wholesale Price Index (WPI) inflation fell to -0.9% in April from 1.3% in March, while Consumer Price Index (CPI) inflation declined to 4.7% from 5.7%. The slide in April inflation was driven by the base effect and a correction in commodity prices. To be sure, prices had spiked due to the Russia-Ukraine conflict during the same period last year, creating a favourable base effect. If monsoons do not play a spoilsport, we expect consumer inflation to average 5% this fiscal vs 6.7% last fiscal.

The Reserve Bank of India (RBI) will, therefore, maintain its pause mode in the June policy – that's the good news!

But, the not-so-good news is slowdown in manufacturing and a sharper decline in merchandise exports. Weak exports have a direct and quick impact on export-oriented domestic manufacturing. In addition, a moderate slowdown in domestic demand due to higher cost of borrowing will continue to temper manufacturing in the current fiscal.

Over the past three decades, despite various attempts to push manufacturing up, its share in gross domestic product (GDP) has risen only modestly. The bulk of the share shed by agriculture was picked up by services.

From a global perspective, India's manufacturing sector and exports will face geopolitical crosscurrents. On the one hand, the general trend of deglobalisation and protectionism will reduce opportunities for exports. On the other, diversification of supply chains with a tilt towards friend-shoring/near-shoring will nudge investments towards India. These trends, together with the government's efforts to improve physical infrastructure and incentivise private investments in key manufacturing sectors via the production linked incentive scheme, will create new opportunities for the manufacturing sector.

That said, services will continue to be the key diver of growth for two reasons. One, services already contributes 54% to India's GDP, while manufacturing accounts for a mere 18%. Two, the domestic and global markets offer ample opportunities for expansion of services.

Services sector exports have been expanding at a rapid pace with new momentum from global capability centres. Structurally, services exports should continue to increase their share in the overall export basket, as they have historically done. Domestic services such as retail, trading, e-commerce, and personal services should continue to do well as demand for these services will rise. Fast-forwarding of digital infrastructure creation also creates tailwinds for rapid expansion of financial and other services.

For India, choice is not manufacturing or services, but a balance of both.