India's Ascendance as a Manufacturing Hub: A Closer Look

India is poised to emerge as a prominent worldwide manufacturing hub, with the potential to export products valued at USD 1 trillion by 2030. The manufacturing sector, accounting for 17% of the nation's GDP and employing over 27.3 million workers, holds a crucial place in the Indian economy. By implementing various programs and policies, the Indian government aims to achieve a manufacturing sector contribution of 25% to the overall economy by 2025. The manufacturing sector encompasses a wide array of industries, including textiles, pharmaceuticals, automobiles, and consumer durables, showcasing its diversity.

The introduction of the Goods and Services Tax (GST) is set to transform India into a unified market, encompassing a GDP of USD 2.5 trillion and a population of 1.32 billion. This combination of factors serves as a compelling attraction for investors, positioning India as a highly appealing investment choice. Moreover, manufacturing plays a vital role in India's merchandise exports. India's manufacturing exports have historically experienced a growth rate ranging from 5% to 10% in the pre-COVID-19 era. However, in the past two years, exports have witnessed remarkable expansion, with a compound annual growth rate (CAGR) of 15%. In the fiscal year 2022 (FY22), India achieved a milestone of USD 418 billion in manufacturing exports.

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India offers cost advantages in terms of labor and resources. The country has a skilled and abundant workforce, including a significant proportion of young individuals, which provides a competitive edge in terms of labor costs. Additionally, India has access to diverse raw materials, further supporting manufacturing activities across various sectors. Moreover, India's strategic geographical location provides easy access to major global markets, enabling efficient supply chain management and logistics. The country has developed robust transportation and communication infrastructure, including ports, airports, and an extensive road and rail network, facilitating the smooth movement of products.

Annual Sectoral Growth Rate (in %) from FY2019-20 to FY2021-22

Sector	2019-20	2020-21	2021-22
Manufacturing	-1.4	-9.6	11.8

Source: National Statistical Office

Favorable Manufacturing Environment for Multinational Companies

With a massive population, India has witnessed a rise in affluence among its people in recent years. As a result, there is a growing market demand for various products offered by foreign companies. As the disposable income of the population rises, there is a growing interest among multinational companies to introduce their products to the Indian consumer base. To achieve this goal in a cost-effective manner, many companies are opting to establish manufacturing facilities within India. Consequently, the anticipated rise in consumption is likely to fuel the growth of manufacturing operations in the country. With significant domestic demand, India possesses two more primary assets to capitalize on this unique opportunity: the proactive efforts of the Indian Government to promote manufacturing, and a distinct demographic edge characterized by a sizable proportion of young workforce.

 

The introduction of the "Make in India" policy by Prime Minister Shri Narendra Modi has resulted in a favorable business environment, economic transparency, and conducive policy interventions. As a direct outcome of these initiatives, major global corporations such as Toshiba, Boeing, Samsung, Apple, General Electric, Siemens, HTC, etc., are establishing manufacturing plants in India. As global companies adjust their manufacturing and supply chain approaches to enhance resilience, India finds itself in a distinctive position to emerge as a global manufacturing hub.

 

Government Initiatives Promoting Manufacturing in India

 

• Make in India Initiative: The initiative was launched on September 25, 2014, with the goal of promoting investment, fostering innovation, and establishing world-class infrastructure to position India as a hub for manufacturing, design, and innovation. It stands out as a unique, single initiative that emphasizes the importance of local manufacturing and showcases India's capabilities to the global market. Importantly, the 'Make in India' initiative is not limited to specific states, districts, cities, or areas, but is being implemented throughout the entire country.

 

• Production Linked Incentive (PLI) Scheme: With the aim of achieving self-reliance and promoting indigenous manufacturing, India has introduced Production Linked Incentive (PLI) Schemes for 14 key sectors. These schemes, with a total outlay of about USD 24.03 billion (Rs. 1.97 lakh crore), are strategically designed to bolster India's manufacturing capabilities and boost exports. The implementation of these schemes holds tremendous potential for generating substantial production, driving economic growth, increasing exports, and creating significant employment opportunities in the next five years and beyond. These initiatives align with India's vision of fostering a robust and self-sufficient manufacturing ecosystem to propel the nation toward economic prosperity. The Production Linked Incentive (PLI) scheme is designed to provide companies with incentives based on the incremental sales generated from products manufactured within domestic facilities. For example, Dixon Technologies, an Indian contract manufacturer, has become the first producer of mobile phones to get approval for the disbursement of incentives under the production-linked incentive scheme by the government. The company will be eligible to receive around USD 6.4 million (Rs 53 crore) for the first quarter of operation between October to December 2021, as an incentive on incremental sales.

 

• Industrial Corridor Development Programme: To accelerate manufacturing growth, the Government of India (GoI) has implemented the Industrial Corridor Development Programme in collaboration with state governments. This program aims to develop greenfield industrial regions, areas, and nodes with sustainable infrastructure, while also providing plug-and-play infrastructure at the plot level. Under the National Industrial Corridor Program, 11 industrial corridors are currently being developed in four phases. The objective of these corridors is to create favorable environments for manufacturing, attract investments, and facilitate the establishment of industrial facilities.

 

In addition to these, the Indian government has implemented several measures to improve the ease of doing business and promote investment in the country. One such initiative is the National Single Window System (NSWS), which serves as a one-stop platform providing end-to-end facilitation and support to investors. Additionally, the PM Gati Shakti National Master Plan (NMP) has been launched to facilitate data-driven decision-making for integrated infrastructure planning, aiming to reduce logistics costs. The government has also introduced the Scheme for Special Assistance to States for Capital Investment, providing additional funds for infrastructure development. Furthermore, the National Logistics Policy (NLP) has been launched to enhance the efficiency and competitiveness of the logistics sector, ultimately boosting economic growth and employment opportunities while aligning with global standards. These initiatives collectively contribute to India's goal of improving the business environment, attracting investments, and fostering sustainable economic development.

 

Capitalizing on China's Declining Competitiveness

India is currently well-positioned to capitalize on China's declining competitiveness, which stems from issues such as inferior product quality, trade disputes, and border conflicts. Additionally, India is reshaping its trade policy to align with the increasingly popular China-plus-one strategy. This strategy entails companies diversifying their business operations to destinations beyond China, recognizing the benefits of such an approach.

 

The prohibition on importing Chinese products has created significant opportunities for Indian producers. By 2030, the Indian manufacturing sector has the potential to contribute over USD 500 billion annually to the global economy. Moreover, India has made noteworthy progress in terms of ease of doing business, moving up from the 142nd rank in 2014 to 63rd in 2020.

 

Sectoral Growth and Potential

India is swiftly gaining prominence as a favored destination for foreign investments in the manufacturing sector. The inflow of Foreign Direct Investment (FDI) equity in the manufacturing sectors witnessed a remarkable surge of 76% in FY2021-22, amounting to USD 21.34 billion, as compared to the previous FY2020-21, which recorded USD 12.09 billion.

 

The Indian Government has implemented a series of transformative reforms within the FDI policy framework, encompassing various sectors such as insurance, defense, telecom, financial services, pharmaceuticals, retail trading, e-commerce, construction and development, civil aviation, and manufacturing.

 

Addressing Challenges in India's Path to Manufacturing Hub Status

While India has made significant strides in becoming a manufacturing hub, several challenges persist within the sector. Despite improvements, India still faces infrastructure deficiencies such as inadequate transportation networks, unreliable power supply, and insufficient logistical capabilities. In contrast to China, which allocates approximately 20% of its GDP for infrastructure construction annually, India's expenditure on infrastructure construction accounts for only 3% of its GDP. These deficiencies can lead to increased costs, delays in production, and supply chain disruptions, affecting the competitiveness of the manufacturing sector.

 

Moreover, the manufacturing sector in India faces a significant disadvantage due to poor and inconsistent electricity supply. With an annual power gap of over 10% and one of the lowest per capita power consumption rates in the world, the country's manufacturers are adversely affected. Furthermore, the lack of certified factories poses a challenge to India's ambitions of becoming a manufacturing hub. While a significant majority of factories in China hold ISO or BSI certifications, finding similar certified operations in India can be challenging. In fact, a large number of Indian factories fail to meet even basic inspection standards. These practical issues act as deterrents for serious international buyers considering India as a sourcing destination.

 

A Promising Future

In a nutshell, with achieved dominance in the service sector, India is now actively pursuing its aspiration to become a global manufacturing hub. This vision is clearly demonstrated by the introduction of the "Make in India" initiative, spearheaded by Prime Minister Narendra Modi. As part of this initiative, special incentives and benefits have been unveiled to attract multinational companies and encourage them to establish manufacturing facilities in India. Consequently, this approach has captured the attention of numerous American companies seeking to diversify their supply chains and reduce their reliance on China. While it may be premature to expect India to directly compete with manufacturing powerhouses like Japan, Germany, and China in the immediate future, the transformative process in the manufacturing sector is already underway.

India possesses several favorable factors that position it as a potential future global manufacturing powerhouse. With a proactive reform agenda, coordinated efforts between the public and private sectors, efficient execution, and adept management of geopolitical risks, the country has the opportunity to experience a golden age of manufacturing in the next 25 years.

 

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