Manufacturing Sector of India – Opportunity Assessment
- Arjun Bhuwalka
- Sep 7, 2020
- 9 min read
Contributions by Rohini Chowhan
Indian manufacturing sector offers tremendous growth opportunities for international companies as it drives the next phase of economic growth with the “Make for World” and “Atmanirbharta” vision
India Manufacturing Sector
Over the last 10 years, the contribution of the Indian manufacturing sector to the country’s GDP has hovered between 14% and 17% with output at USD 395 billion in 2019. The nation’s flagship ‘Make in India’ program, unraveled in 2014, outlines the manufacturing sector’s potential to reach USD 1 trillion by 2025 and contribute 20% to 25% of the country’s GDP. The goal is to unleash the untapped potential of India’s manufacturing sector – tripling output over the next five years, creating 100 million jobs, and reducing dependence on the service sector (50% of GDP).
India is the world’s fifth largest economy and manufacturer with a GDP of USD 2.9 trillion in 2019 and is expected to reach USD 5 trillion by 2025, driven primarily by growth of the manufacturing sector
India has a massive labor force of ~500 million and lower wage rate (USD 0.9 per hour vs. USD 3.9 per hour in China), making it an attractive manufacturing destination. However, Foreign Direct Investment (FDI) restrictions, infrastructure deficiencies, complex tax system, skills shortages, low productivity, archaic labor laws, etc. have plagued manufacturing output (3% versus China’s 28% and dominated by low-value low-tech goods), manufacturing exports (2% versus China’s 11%), and foreign investment inflows in the manufacturing sector.
The recent initiative of ‘Atmanirbharta’ (self-reliance) hopes to provide much-needed impetus to address these snags at the grass root level – make it easier to manufacture in India, reduce imports, and fuel growth of high-tech goods. The current global upheaval has created a huge opportunity for India to be the new frontier exporter and FDI destination and fulfill its goal to be a ‘vibrant’ economy based on – intent, inclusion, investment, infrastructure, and innovation.
The Indian manufacturing sector has under performed with its growth lagging the country’s GDP growth in eight of the last 10 years. The sector has also contributed a meager 10% to total employment in India (50 million) versus 30% in China in the last 10 to 15 years. However, the manufacturing sector is expected grow, driven by rising purchasing power of a huge middle class (~80% households will become middle income and will fuel 75% of consumer spending by 2030) and growing pool of skilled and semi-skilled workers.
The ‘Make in India’ program has infused optimism in a crumbling manufacturing sector that faces
several challenges – weak MSMEs, stagnant core sectors, outdated technology, falling investment
in construction, infrastructural hurdles, etc. that were unable not sustain growth.
Note: Manufacturing FDI equity inflows are based on select sectors that consist of manufacturing activities
Manufacturing sector has lagged in attracting foreign capital (30% of cumulative total FDI inflows
2000-2019) due to lower ease of doing business and FDI restrictions in certain sectors but recent
relaxations have been made in this sector to spur growth
Figures in USD billion
The ‘Make for World’ initiative of positioning India as an attractive global manufacturing and export hub,
and an alternative to China is expected to attract foreign companies that are eager to also capture the
massive and growing domestic market.
Figures in USD billion
Production linked incentives (PLI), FDI relaxations, high import duties, and other measures are being
taken to bolster local manufacturing and reduce trade deficit and the increasing import dependency.
India faces stiff competition from other emerging Asian countries to attract foreign investment and grow exports in its manufacturing sector. The manufacturing sector of these countries benefited more from fallout of the US-China trade war (India attracted only 3, Vietnam 26, and Thailand 8 of the 56 companies that moved out of China in 2018-19) due to lower costs and tariffs, and proximity to China.
The Indian government is taking various measures to boost its manufacturing sector, including attracting more foreign investment. Recent events such as economic and supply challenges due to COVID-19, and border skirmishes with China have highlighted India’s increasing dependence on Chinese imports (largest), furthering the focus on driving growth in manufacturing.
The government’s ‘Make in India’ program advocates a four-fold strategy of improving infrastructure, manufacturing, skills, and ease of doing business to position India as go-to-market for exports, and investments. More recently, it launched the ‘Atmanirbhar Bharat Abhiyana’ program with a USD 284 billion fiscal package (~10% of GDP) to recover from COVID-19 pandemic induced losses and also tackle the issues of land, labor, liquidity and laws.
Among the 25 sectors earmarked under the ‘Make in India’ initiative, the Government has highlighted a few strategic sectors that will shape the future of manufacturing by adopting advanced technologies such as Industry 4.0, IoT, AI, ML, Robotics to help revive the sector.
This is true, especially for the high-tech manufacturing sector as it has the potential to attract USD 21 billion in investments and create 1.9 million jobs over the next five years although it currently contributes only USD 20 billion to manufacturing exports (9% share) and has grown at a CAGR of only 2% between 2014 and 2018. The high-tech manufacturing sectors of Electricals & Electronics, and Machinery are expected to generate an output of USD 400 billion and USD 100 billion, respectively by 2025.
1. Automotive
The Indian automotive industry accounts for 50% of the country’s manufacturing GDP and it is the world's largest manufacturer of two-wheelers, three-wheelers and tractors, and fifth largest vehicle manufacturer overall. It manufactures 30 million vehicles annually (5 million exported) which is expected to increase to 85 million vehicles annually by 2030. Similarly, the Indian automotive component industry is very competitive with costs 10% to 25% lower than that of Europe and Latin America.
The automotive industry is already a key contributor to the ‘Make in India’ initiative and in conjunction launched the Automotive Mission Plan 2016-2026 (AMP2026) that defines the 10-year vision for the vehicles, auto components, and tractor industries; the National Electric Mobility Mission Plan (NEMMP) to reduce emissions and oil dependence; and the Green Urban Transport Scheme/Urban Green Mobility Scheme to achieve a target of 6 million electric & hybrid vehicles on road. Testing and R&D centers have also been set up to enable low cost automotive engineering solutions.
The industry is expected to grow annually at 3.5% to 4% to USD 260 to 300 billion and exports to USD 80 billion (35% to 40% of output). Further, its contribution to GDP is slated to increase to 12% from 7% and generate 65 million new jobs.
2. Pharmaceuticals
India is referred to as the ‘pharmacy of the world’ as it is the world’s third largest pharmaceutical industry by volume and has the largest share of exports in generics (20%). The Indian pharma market is valued at USD 33 billion growing at 9.4% annually with exports worth USD 20 billion. However, India imports 70% of its raw materials from China. To reduce import dependence, the government has rolled out a USD 1.8 billion package to promote local production of 53 bulk drugs and set up three bulk drug parks with R&D facility.
The incentives are expected to bring down the cost of production significantly. Further, a liberal FDI policy and an effective corporate tax rate of 17% will help increase investments flow as drugs worth USD 130 billion are expected to go off-patent by 2022, presenting a huge opportunity for India.
3. Food Processing
The Indian food processing sector contributes 8.3% to manufacturing GDP with a gross value add of USD 25.6 billion, contributing 14% of employment in all manufacturing factories and exports worth USD 35 billion by virtue of its rich production base that ranks second in the world.
The sector is recognized as a special focus in the National Manufacturing Policy and the aim is to build a robust supply chain consisting of a National Food Grid with 41 mega food parks, 228 cold chain projects with 34 million MT capacity, infrastructure for agro-processing clusters, etc. under the Pradhan Mantri Kisan Sampada Yojana (PMKSY) with a budget allocation of USD 177 billion.
High Tech Sectors
4. Electronic Design and System Manufacturing (EDSM)
The EDSM accounts for imports worth USD 50 billion and exports of USD 9 billion annually, toppings the list of imports that can be substituted with local manufacturing. Consumer electronics (mobile phones and consumer durables) make up 50% of this sector with mobile handsets accounting for 28%.
Under the National Electronics Policy and the recent (Production Linked Incentive) PLI scheme, the sector presents an opportunity to reach USD 400 billion at an annual growth rate of 30% over the next five years by building on India’s capability in chip design and embedded software, and burgeoning domestic market (900 million internet subscribers by 2025). The growth in EDSM is expected to be led by manufacturing of 1 billion mobile handsets worth USD 190 billion by 2025 with an export capability of 600 million sets worth USD 110 billion.
5. Medical Devices
The medical devices market in India is currently USD 11 billion, growing at 15.8% annually and expected to reach USD 50 billion by 2025. India stands among the world’s top 20 medical device manufacturers. However, 86% of its medical devices are still imported. To reduce this dependence, a 5% PLI scheme with a budget of USD 485 million is proposed for electronic medical devices in four categories - radiology, nuclear imaging, anesthetics, cardio-respiratory and renal devices. Funding of USD 53 million has also been provided to set up four medical devices parks in the country.
6. Electrical Machinery
The installed power capacity in India is expected to reach 350 GW by 2022 and this presents huge opportunity in manufacturing of power generation equipment (boilers, turbines, generators), and transmission and distribution equipment (cables, transformers etc.).
India is the third largest producer of electricity in the world and its domestic market is expected to touch USD 100 billion by 2022 (25% from generation and 75% from transmission) under the Indian Electrical Equipment Industry Mission Plan along with ‘Power for All’ plan to add 93GW by 2022.
7. Defence
India is actively seeking to reduce its defence imports (second biggest globally) which accounts for 60% of the annual defence budget spend of USD 63 billion (third largest globally) under the Defence Procurement Procedure. India currently manufactures only USD 7 billion worth of equipment and USD 250 million worth of parts involving 6,000 MSMEs and exports worth USD 1.5 billion.
To modernize the sector, the government has allocated USD 130 billion under the Defense Production and Strategic Partnership Policy, liberalized FDI policy to allow up to 49% foreign ownership by automatic route, and two defence related industrial corridors are under development. The key areas of growth in this sector are supply chain sourcing, modernization of armed forces, infrastructure development, and R&D.
8. Renewable Energy
India’s major focus includes green energy and green manufacturing to reduce oil imports and emissions. As per the Paris Accord on Climate Change, the Government has set a target of adding 175 GW of renewable power by 2022 to its current capacity of 73 GW.
This offers massive investment opportunities in development of small hydro projects, offshore wind energy (fourth largest wind power capacity), ultra-mega solar parks (fifth largest solar power capacity), biogas plants, battery packs for electric vehicles, and many other opportunities.
India offers tremendous growth opportunity for foreign manufactures to enter the domestic market and build a global export hub.
The various initiatives undertaken by the Government in the past few years and the recent fiscal stimulus support provided amid the COVID-19 pandemic rightly addresses the nagging issues of the Indian manufacturing sector that has suffered from a lack of policy focus despite a competitive edge in manpower and cost.
The Government has identified that strengthening the MSMEs (both in skills and finance), backbone of the manufacturing industry, is fundamental in driving manufacturing output and exports and in achieving overall economic prosperity as it helps uplift a huge section of the population from poverty.
Along with this, creation of a robust and modernized infrastructure and optimization of the logistics sector that are at present highly unorganized and marked with delays and poor turnaround, will establish better connectivity and alleviate supply chain issues of manufacturing sector and help it integrate better with the global value chain. As per a World Bank report - a 1% increased participation in the global value chain could boost India’s per capita income levels by more than 1%.
The government has also selected sunrise industries such as EDSM to gain a stronger foothold in exports by offering lucrative schemes such as PLI. As a result, EDSM has already garnered FDI worth USD 11.5 billion from 24 firms to set up mobile manufacturing units in the country despite the ongoing COVID-19 pandemic. The scheme is being extended to other sectors such pharma, food processing, and automotive where India has a comparative advantage in terms of production capacity, supplier ecosystem, and global supply chain linkage.
However, successfully maneuvering the complex system and diverse market of India is not for the faint-hearted. It is critical for companies that are looking to enter the Indian market to systematically assess the opportunity by doing an in-depth analysis of the current and future market, the regulatory environment, the supply chain and logistics infrastructure, labour system, identify the right partners, the right locations, and many other factors that will determine their market entry strategy and success.
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