India’s move towards becoming a manufacturing powerhouse.
India is world’s ninth largest economy based on its GDP. If we look at the purchase power parity (PPP), India ranks third in the entire world. If we compare these numbers to India’s manufacturing output, we would be surprised. India contributes only 2-3% to the global manufacturing output. Just for sake of comparison, India’s immediate neighbor, China roughly has a share ten times larger than India in terms of manufacturing output. Over the last one decade, India’s service sector has expanded roughly four to five times more than the manufacturing sector. For a moment, let us forget these stats and look at a few other numbers. For instance, average daily wage of a factory worker in India is significantly lower than the same in China. Or China is facing severe problem due to lack of young workforce whereas India is the country with largest number of under 30 population globally. As per IBEF data, Gross Fixed Capital Formation which directly translates into net investment in fixed assets stood at USD 615 billion in India in FY 20. What all these stats clearly indicate is the underutilisation of India’s capabilities as a global manufacturing hub for a long time and how various factors are coming together to make India world’s factory.
In this article we are going to look at some of the major factors that are driving the growth of manufacturing sector in India.
Diversification of supply chain and India’s favorable policies
Depending on just one country for manufacturing supply chain was considered to be Normal practice till the pandemic happened. Companies like smart phone manufacturers or textile manufacturers found nothing to worry about even if whole of their supply chain was in China. Companies across the world were forced to change this mindset due to pandemic as well as due to increasing trade wars. For instance, as per a Reuters report, there is a strong request from Apple to its part suppliers to move parts of their production out of China. These suppliers have multiple options apart from China and India is just one of them. In Feb 2021, Bloomberg reported 24 cell phone assembly partners of large cellphone manufacturers moving their base out of China. It is interesting to understand why these 24 companies chose India against other possible options such as Vietnam or Cambodia.
As we discussed in the opening paragraph of this article, India’s potential as manufacturing hub is under-utilised or rather hardly utilised and no one knows this better than the Indian government. Indian government has been looking at the pandemic as a blessing in disguise and has been working very hard to utilise this opportunity to strengthen India’s position as a Global manufacturing hub. This year, the government announced production linked incentive scheme for 13 industry sectors- Automotive, Mobile phones & Electronics and EV Battery sales getting the major share of the outlay. Government in India expects that the PLI would result in more such moves and could lead to USD 153 billion in worth of electronics manufactured goods to India. After this, it will not be a surprise why Apple plans to expand its manufacturing in India and its prime supplier, Foxconn is also planning to invest USD 1 billion in its plant near Chennai.
One thing the reader should pay attention to is the fact that India is not simply leveraging the difficulty of China. It is the difficulty of China coupled with government’s thoughtful incentives and schemes driving the manufacturing in India to newer heights.
Manufacturing linked to E-commerce.
During the pandemic, physical trade suffered initially, and e-commerce benefitted extremely. Textile and electronics are the two sectors that account for the major chunk in online sales. As we discussed in the earlier paragraph, India is already working on strengthening its position in electronics manufacturing. If we look at the textile sector, India’s output is second to only China. The Make in India initiative by Indian government has provided boost to overall manufacturing sector including textile. Another sector that occupies a major chunk in e-commerce sales is leather. India is one of the leading manufacturers of leather goods in the world. As the penetration of e-commerce increases further, India will need to boost its manufacturing further to cater to this growing demand.
Future of Manufacturing
Due to technical disruptions, manufacturing sector is going to witness drastic changes globally. For instance, manufacturing of EVs will need a totally different supply chain than the manufacturing of existing vehicles. Definition of ‘manufacturing infrastructure’ is also changing rapidly. Due to government’s focus on developing right kind of manufacturing infra, incentives to right kinds of technologies and focus on developing smart manufacturing hubs, there are high chances that India will leverage these changes to its advantages.
Other factors
As we discussed earlier, if we compare India with any other manufacturing destination across the world, India has following evident advantages:
- Low labour costs: India probably has one of the Lowest daily wages for factory labours in the world. This makes India the most favorable place for labour intensive manufacturing.
- Large number of employable youths: India has a large number of young population which is ready to work. This makes costs of finding and hiring labour in India minimum.
- Availability of skilled human resource: Manufacturing is not more about just unskilled labour. On the other hand, due to IoT and smart manufacturing technologies, this sector demands highly skilled engineers. India is home to a large number of freshly graduated as well as experienced engineers.
- English literacy: Unlike many other competitors like Bangladesh, Cambodia, Vietnam or even China, the human resource in India is highly skilled in English, the global language.
- Infrastructure: So far, infrastructure was one of the weakest points of India’s manufacturing story. Costs to ship raw materials as well as finished goods within and out of the country were high as well as the transport was unreliable. Due to correct interventions at pain points, India’s infra is fairly comparable with other countries except a few exceptions. Due to present government’s focus on developing freight corridors, better road connectivity, port development, India’s manufacturing infra is bound to grow stronger.
As it can be observed, many factors are moving in right direction to secure India’s position as a manufacturing powerhouse. To know more, write to me at sudhir.nerurkar@quanzen.com
