How India can become one of key nodes in global manufacturing value chain

June 30, 2020 7:45 AM

The manufacturing opportunity for India is huge. The government must ease land acquisition and enforce anti-dumping duties on cheap to ensure India cashes it in

For India, this presents a tremendous opportunity to enter the $1-trillion global manufacturing club.For India, this presents a tremendous opportunity to enter the $1-trillion global manufacturing club.

By Deepak Jain, Sambit Patra & Sushil Pasricha

There are times when you need to adjust to a disruptive environment. At other times, disruptions need to be met head-on, with your own brand of change. The Covid-19 pandemic has exposed the fault lines in global trade and its financial roadmap, dislocating global manufacturing value chains, almost irrevocably. This sudden disruption has raised a fervent clamour to diversify the existing global supply chain. For India, this presents a tremendous opportunity to enter the $1-trillion global manufacturing club.

Resiliency will be the key focus going forward—cost-efficiency will not be the only consideration while designing global supply chains. The Covid-19 pandemic will further accelerate movement of exports away from China, as companies will have to think about a China-plus-one strategy. India could indeed become one of the key nodes in the global manufacturing value chain.

Of the total world exports worth $19 trillion in 2019, China contributes 13.3% while India’s share is a minuscule 1.7%. Depolarisation presents an opportunity for India to become a $1-trillion manufacturing gross value add (GVA) by 2025 by being an alternative to China in the world exports basket and indigenisation of supply chains for domestic consumption.

India to take on this gauntlet!

India, with its current manufacturing scale, is perfectly poised to take on this gauntlet. We have a sizeable manufacturing GVA contributing 15% to the GDP. India’s large productive workforce, competitive cost of operations and adapting to new technologies puts the country in a very good stead. India further needs to build its critical logistics infrastructure like highways, ports, airports, etc, in order to become the alternate manufacturing destination for the world.
India has also gained advantage over China in the past decade, due to China’s rising wages, a tightly controlled currency, and increasing costs due to environment health and safety (EHS) regulations. Between 2008 and 2019, average wages in India grew by 5% CAGR, while in China wages went up by 11%. The rupee depreciated by 6.3% against the US dollar during the last two years, while the Chinese yuan’s depreciation against the dollar was only 1.8% in the corresponding period, thus making Indian exports more competitive than China.

Over the past couple of years, certain sectors in India including electronics, chemicals, industrial machinery and plastics are already showing a strong export growth. Through 2017-19, export of electrical parts and electronics grew by 29%, and export of chemicals grew by 14%, from India. We believe that electrical & electronics, automotive parts, chemical and pharmaceuticals will benefit with the first wave of supply chains shifting into India.

Advantage India

The positive impact of ‘India advantage’ has already started to show in our exports growth across several sectors such as chemicals, electricals, industrial machinery and plastics. Moreover, US tariffs on China resulted in India gaining $755 million in additional exports to the US, in the first half of 2019. At the same time, China’s cost advantage is declining. For example, difference in cost of manufacturing of chemicals between China and India is currently less than 5%. Samsung closed its three-decade-old factory in China and shifted operations to build its world’s largest mobile factory in Noida in India, which enabled the Korean manufacturer to double its production capacity of mobile phones to 120 million units per year.

As a ‘global preferred exporter’ of manufacturing goods, India has a clear $200-250 billion opportunity. New export opportunities in electronics, vehicles and vehicle parts, chemicals and pharmaceuticals are just waiting to be grabbed. By 2025, India can more than double their exports to the US as an alternate to China—the $60-80 billion export opportunity is wide open for Indian enterprises from the US itself.

Indigenisation of supply chain leading to imports substitution presents another $50-70 billion opportunity. Indian manufacturers will also need to localise their supplier base and reduce import dependence on China. Electronics, apparel & textiles, automotive and chemical sectors will greatly benefit from localisation and offer new export opportunities. Add these to the $400-billion manufacturing GVA in 2019 along with inherent manufacturing growth and we can indeed take our manufacturing GVA to $1 trillion, thus accelerating our journey towards the ‘Make in India’ vision (see graphics).

The must-do imperatives

In a recent survey conducted by Bain & Company with global chemical manufacturers, two-thirds have started board discussions to consider diversifying their supply chains from China, but switching to India is not a certainty. For that to happen, India’s private sector needs to identify, on priority, winnable business segments where the scope of localisation and new export opportunities exists. They will also need to develop a local supplier ecosystem and build in-house capabilities. Additionally, the ecosystem to support these manufacturing needs will also have to be expedited urgently.

The government has its task cut out. Policies pertaining to land acquisition to avoid delays, further reforms on taxes, financial incentives to ease liquidity headaches for entrepreneurs are crucial at this stage. The manufacturing sector will need to attract investment, and foster innovation. And most of all, strict enforcement of anti-dumping duties on cheap imports is a must.

Thus, in the post-Covid-19 era, we need to set up two national missions—one to reduce process friction points for inward investment, and another to enhance our transnational trade. Or else the trillion-dollar opportunity will go abegging!

Jain and Patra are partners and Pasricha is principal, Bain & Company

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Data drive: Slight respite in infection growth
2Covid-19: Will the promise of vaccines match the promos?
3McKinsey Report: Chilling news for India on global warming