Domestic manufacturing sector and many companies in India have begun to reconfigure their sourcing and footprints for greater reliability and resilience.
Avneet Singh Marwah
Today, India along with many other countries stands at the turning point of its economic regrowth, while still reeling from the lasting impact of the global pandemic of COVID’19. The year 2020 has been an unprecedented one, with many learnings and unlearning at the same time. Reflecting back on this exceptional year, it is apparent that Indian manufacturing has gained on many grounds as the Government of India continued its thrust towards ‘Make in India’ and pushed the country to truly, ‘Go Local Vocal or become Atmanirbhar or Self-reliant’. All this is evident, as the domestic manufacturing sector and many companies in India have begun to reconfigure their sourcing and footprints for greater reliability and resilience.
Unmistakably on its path to becoming the global epicenter for hi-tech manufacturing the 3 E’s that are propelling the Indian manufacturing sector are – economy, employment and efficiency. These are pushing the sector to claim a place for itself on the world map. Prime Minister Modi’s call to ‘find opportunity in times of crisis’ has certainly set the nation on a growth trajectory. This is also visible with the confidence exhibited by global giants like GE, Siemens, HTC, Toshiba , Boeing etc , as they are biting into the growing pie of Indian market sized over a billion consumers and their increasing capacity to spent. All these brands have either set up or are raring to set up manufacturing plants in India, thereby localizing their offers.
11 manufacturing value chains, a $300 billion of GDP potential
According to McKinsey analysis, there are 11 categories in India’s manufacturing value chains that can generate, within the next seven years, about $320 billion more in gross value added (GVA). Out of this about 80 per cent potential resides in the six value chains of: chemical products and petrochemicals, agriculture and food processing, electronics and semiconductors, capital goods and machine tools, iron ore and steel, and automotive components and vehicles.
So, what is India’s boon?
Although some of India’s manufacturing value chains are reaching levels of high global competitiveness, there still remains many a slips. According to the Centre for Monitoring Indian Economy (CMIE), estimates are that GVA in manufacturing has grown 0.9% year-on-year in the September quarter. The return to growth from a steep 39.3% contraction in the preceding quarter has been attributed to an extraordinary profit performance by listed manufacturing companies during the pandemic. This has made India an even more attractive destination for investment in the sector.
The actual potentiality of this growth is coming from – India’s advantage in raw materials, manufacturing skill, and entrepreneurship. India’s natural resources pool (for example, iron ore, bauxite, high solar insolation, and cotton) and low-cost labor are a boon to the makers of basic metals, textiles and apparel, renewable energy, and chemical products. The country’s large pool of skilled and trained workers, powers up its skill-intensive value chains such as pharma, capital goods, and automotive components.
Secondly, the potentiality of four market opportunities of: export growth, import localization, domestic demand, and contract manufacturing gives India a new-level of competitiveness and scale. Having said this, its also noteworthy to mention that from fiscal year 2006 to fiscal year 2012, India’s manufacturing-sector GDP grew by an average of 9.5 percent per year. After this, over the next six years, growth declined to 7.4 percent. And now, in fiscal year 2020, manufacturing generated 17.4 percent of India’s GDP, little more than the 15.3 percent it had contributed in 2000.
So, what is making India’s manufacturing ecosystem a bane despite opportunities ?
Although there are huge upsides to Indian manufacturing however the sector still remains cloaked with its set of challenges and/or limitations. There are several factors that help to explain why Indian manufacturers, despite great potential, are creating limited value. A few, have to do with the costs of infrastructure and key inputs. The others are, poor logistics that cause delays and raise inventory costs; high prices for power and credit inflate operating expenses. The small, fragmented companies that make up this value chain, are the ones, which cannot operate productively, leave aside peak efficiency; these can neither innovate quickly to keep pace with competition; nor command price premiums because of the lack of strong brands and marketing.
What can be the front-runners of Indian Manufacturing and why?
With the growth of domestic sales ($180 billion of additional GVA), it is obvious that Indian manufacturers can tap into more healthy consumer markets for products such as fast-moving consumer goods, consumer durables, food products, automotive products, metals and renewables. To capture this opportunity, manufacturers can consider focusing on offering quality products at different price points. Several of these consumer markets can grow provided that factors like consumer credit and attractive retail interest rates are in place. Export growth ($70 billion to $75 billion of additional GVA). Exports of manufactured goods can increase from 14 percent of manufacturing GDP to more than 25 percent. Much of this increase can come from sectors where Indian manufacturers are already competitive.
To compete in foreign markets, manufacturers must achieve economies of scale, meet international quality standards, comply with foreign regulations, and sustain R&D investments. Import localization ($55 billion to $60 billion of additional GVA). India’s manufacturers can challenge foreign competitors for market share in a few strategic sectors too. An opportunity to reduce India’s spending on imports from 30 percent of all manufactured goods to 15 to 20 percent is indicated here. To capture this, domestic manufacturers need to upgrade the technology and quality of their offerings while lowering prices.
Contract manufacturing for global markets ($4 billion of additional GVA). Indian manufacturers are operating well below their maximum capacity, with utilization ranging only 60 to 70 percent across sectors (according to the Reserve Bank of India). In select value chains, Indian manufacturers can fulfil overseas orders in the near term through contract manufacturing.
To sum it, the manufacturing sector of India has the potential to reach US$ 1 trillion by 2025, implementation of the Goods and Services Tax (GST) will further make India a common market with a GDP of US$ 2.5 trillion along with a population of 1.32 billion people, which will be a big draw for investors. According to the United Nations Conference on Trade and Development (UNCTAD), India ranked among the top 10 recipients of Foreign Direct Investment (FDI) in South Asia in 2019, attracting US$ 49 billion—a 16% increase from the previous year.
This is just one of the many indicators, which speak of India’s potential to turn into a manufacturing powerhouse. Keeping in line with this, the Government of India is quick to act as it is, aiming to generate 100 million new jobs in the sector by 2022. With impetus on developing industrial corridors and smart cities, the Government is looking to ensure holistic development that will further assist in integrating, monitoring, and developing a conducive environment for industrial development and will promote advanced practices.
A focussed approach to industrial policy, to lower input costs, improvised ease of doing business across sectors will specifically help in catalyzing the growth of India’s manufacturing value chains by helping them lift their productivity, secure know-how and technology, and gain access to capital. With these reforms, and complementary actions by manufacturing companies, its estimated that the above-identified value chains can more than double their GDP contribution to $500 billion in years to come.
While on one hand, the COVID-19 pandemic has exposed the fragility of not only India but the world’s supply chains. On the other, it has also led global companies and countries across the world, pivot their game by setting up more locations, lessening their dependence on fewer geographies; establishing more manufacturing units and automating processes (with AI integration etc).
These are a few steps, which have tipped the scales in favour of the economies which have been quick to adapt and bounce back however, some nations are yet not ready to take full advantage of these shifts and India is certainly ‘not’ amongst those!
Avneet Singh Marwah is CEO at SPPL, India brand licensee of global brands Thomson and Kodak TVs and washing machines. Views expressed are the author’s personal.