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

India is set to emerge as the leading manufacturing hub in the world with exports touching USD 1 trillion by 2030. The manufacturing sector is a pivot of the Indian economy, having 17% of the country's GDP. More than 27.3 million workers are employed in this sector. This sector must contribute 25% to the total economy of the country by 2025, as per the goal set by the government. The sector comprises automobiles, textiles, consumer durables, and pharmaceuticals, among others, depicting its diversity.

Over the years, India has developed as a great investment destination for worldwide investors. Manufacturing plays a significant role in the country's merchandise exports. The country's manufacturing exports have had a growth rate of between 5% and 10% in the pre-COVID-19 era. Additionally, exports in the last two years have had remarkable growth, with a CAGR of 15%. On top of that, India achieved a remarkable milestone in terms of manufacturing exports, which stood at USD 418 billion in the fiscal year 2022.

India enjoys a competitive advantage in terms of the cost of labor as the country is blessed with a young, skilled, and abundant workforce. Additionally, the country is blessed with an ample skilled workforce, coupled with a high percentage of youth, hence giving it an edge over other major countries in terms of the availability of cheap labor. Besides, access to most varieties of raw material bases is easy in India, thus generalizing support for the manufacturing industries. Moreover, the geographical location of India is strategically positioned to front the main markets of the world, hence making supply chain management and logistics easier. Moreover, impressive infrastructural facilities in the domains of transport and communication, in terms of ports, airports, and an extended road and rail network, make the free flow of goods easy within this country.

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

Favorable Environment for Multinationals in Manufacturing

With a large population, the country has witnessed growing affluence in recent times. As a result, various products offered by foreign firms or companies find themselves in growing demand in the market. With the rise in disposable income of the populace, there is also a growing interest among multinational companies to introduce their products to the Indian consumer base. Many firms set up their own manufacturing units within India to tap into this potential demand at an affordable price. With the expected increase in consumption, it can be assumed that this will boost the manufacturing activity. With huge domestic demand, India has two other principal assets that would enable the capturing of this exceptional opportunity: proactive efforts from the Indian Government for the promotion of manufacturing; and a clear demographic edge with a huge proportion of youthful workforce.

The "Make in India" policy under the initiative of Prime Minister Shri Narendra Modi has put in place an enabling business environment, economic transparency, and conducive policy interventions. Big global companies like Toshiba, Boeing, Samsung, Apple, General Electric, Siemens, HTC, etc., directly benefit from such initiatives and are setting up their manufacturing units in India. As companies across the world are adjusting their manufacturing and supply chain approaches to a resilience-driven strategy, India places itself in a very unique position to become a global manufacturing hub.

Government Initiatives Promoting Manufacturing in India

Make in India Initiative: This initiative was started on September 25, 2014, to drive investment, encourage innovation, build best-in-class infrastructure, and make the country a global manufacturing, design, and innovation hub. It's a one-of-its-kind single initiative highlighting the need for local manufacturing and showcasing India's capabilities to the world. Most importantly, the 'Make in India' initiative is not confined to any particular state, district, city, or area; rather, it will be implemented throughout the nation.

Production Linked Incentive (PLI) Scheme: PLI schemes have been announced in 14 key sectors aimed at helping the country achieve self-reliance and encouraging indigenous manufacturing. The total outlay for such schemes on these 14 key sectors could be about USD 24.03 billion. All these schemes are strategically designed to make India a global manufacturing hub while increasing its contribution to global exports. Most such schemes have tremendous potential to generate high production, spur economic growth, increase exports, and create huge employment opportunities over the next five years and beyond. All these initiatives align with the vision that was drawn out by India in building a strong, self-sufficient manufacturing ecosystem that would take this country towards economic prosperity. PLI is about giving companies incentives on the incremental sales accruing from products made within domestic facilities. For instance, Dixon Technologies, an Indian contract manufacturer, became the first manufacturer of mobile phones to get approval from the government for disbursement of incentives under the production-linked incentive scheme. Incremental sales inducement, the company would get around USD 6.4 mn (Rs 53 cr) for the first quarter of operations from October to December 2021.

Industrial Corridor Development Programme: The Government of India has accepted the Industrial Corridor Development Programme in association with the state governments, aiming to bridge this gap and increase the pace of manufacturing growth. In a nutshell, it means a program for the development of greenfield industrial regions, areas, or nodes with sustainable infrastructure while offering plug-and-play facilities at the plot level. Currently, under the National Industrial Corridor Program, 11 industrial corridors are under development in four phases. This, in turn, would help the corridors achieve their very essence: creating conducive environments for manufacturing, attracting investments, and facilitating the establishment of industrial facilities.

Added to these are a few more steps taken by the Indian government in terms of ease of doing business and improving the investment climate. One such initiative is the National Single Window System, enabled as a one-stop platform that can facilitate investors from end to end. Besides, the PM Gati Shakti National Master Plan has been launched to facilitate data-driven decision-making for integrated infrastructure planning with an overall aim of reducing logistics costs in the country. It has introduced a scheme for special assistance to states for capital investment and provided additional funds for developing infrastructure. It has also launched the NLP for the efficient and competitive working of the logistics department, which would support higher economic growth and more employment opportunities with international standards. All these initiatives are pointed toward building India in a way that ensures a better business environment with investments and is sustainably developable.

Capitalizing on China's Declining Competitiveness

A tiff over low-quality Chinese products, falling competitiveness due to the global trade war, and simmering border tensions have put India in a vantage position to replace China. On its part, India is overhauling its trade policy to fit into the increasing mainstream—China-plus-one strategy. It entails companies diversifying their business to countries other than China.

The import bans from China have opened a huge window of opportunity for Indian manufacturers. The manufacturing sector in India by the year 2030 will have the potential to add over USD 500 billion every year to the global economy. In terms of the ease of doing business too, India has progressed and moved up the rankings from 142 in 2014 to 63 in 2020.

Sectoral Growth and Potential

India is fast emerging as one of the most preferred hubs for foreign investments in the manufacturing sector. The inflow of FDI equity in manufacturing sectors increased by 76 percent in FY2021-22 to USD 21.34 billion, as compared to the corresponding FY2020-21, when it stood at USD 12.09 billion.

Government of India has brought host of transformative reforms under the FDI policy framework in these respective sectors, such as insurance and 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 emerged more or less as a manufacturing hub, there are still some underlying problems in this sector. While India has progressed in several ways yet there is a lack of proper infrastructure in this country. India lacks an appropriate transportation network, inadequate power supply, and insufficient logistic capabilities. If compared to China, it spends around 20% of its GDP on building infrastructures; India only spends mere 3% of its GDP on building infrastructures. These deficiencies have a number of important implications for increases in cost, delays in production, and the breaking of supply chains, each negatively impacting the competitiveness of the manufacturing sector.

Poor and erratic electricity supply impinges upon the manufacturing sector of India. With ease, more than 10% power gap a year, coupled with a per capita power consumption rate of less than one of the lowest units in any other country of the globe, is easy on manufacturers in the country. Besides, a handful of certified factories hamper India's potential to become a thriving manufacturing hub. While most of the factories in China have ISO or BSI certifications, it is hard to find similar certified operations in India. In fact, most Indian factories fail to even meet the basic inspection criteria. These are the practical reasons that make serious international buyers somewhat skeptical about India as a sourcing destination.

A Promising Future

In a nutshell, having acquired dominance in the service sector, India is presently following its dream of emerging as a global manufacturing hub. This is quite evident from the fact that when the initiative of "Make in India" was launched, Prime Minister Narendra Modi himself featured at the forefront of things. Under this initiative, special incentives and benefits have been announced to attract multinational companies to set up their manufacturing units in India. Consequently, American companies that are looking at diversifying their supply chain and become less dependent on China have begun taking this route seriously. But one must understand that, even now, it is fanciful to wish for India to compete with Japan, Germany, and China in the realm of manufacturing anytime soon. The change in the manufacturing sector has begun.

These are several positive reasons that make India a future global powerhouse in manufacturing. The proactive reform agenda, harmonization of the efforts of the public and private sectors, efficient execution, and skillful management of geopolitical risks will perhaps make a golden age of manufacturing in the next 25 years.

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