India aims to grow its manufacturing GVA to $1 trillion by 2025-26

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New Delhi | Updated: Dec 13, 2018 3:00 AM

Achieving accelerated and sustainable growth in India’s manufacturing sector, driven by rising global and domestic demand, active policy support and a shift towards Industry 4.0 technologies.

economy, india, india economyAcross key industry sectors, India’s import dependence ranges between 30-40%.

By Rahul Jain, Bitan Datta and Vikas Gupta

India aims to grow its manufacturing gross value added (GVA) by about 3 times to reach $1 trillion by 2025-26. This implies a compounded annual growth rate of about 12%, which is a significant leap from the current growth rate of 7-8%. Achieving this target calls for a multipronged growth strategy for India’s manufacturing sectors—increasing their share of global exports and growing the capability to actively substitute imports with local production while continuing to cater to rising domestic consumption. Due to the recent turn of events, several industry houses prefer the services sector for investment over the manufacturing sector. This is owing to the diminishing returns and relative risk profile in manufacturing. A concerted effort is required both from industry and government. On one hand, industry needs to step up its game by leveraging technology and driving productivity and, on the other hand, the government needs to enable competitiveness by reducing the cost of doing business and providing policy support till necessary scale is achieved.

Across key industry sectors, India’s import dependence ranges between 30-40%. While in some selective cases, duty and tariff structures need review, one key aspect to focus on for the Indian manufacturing sector is technology depth and the ability to produce a range of products that cater to user industry requirements. Process and control equipment, such as power generation, steel and other metal production, high-precision machining stations, etc., represent a small sample of many such technology gaps. Bridging this technology gap is imperative for Indian manufacturers to be competitive and serve demand centres globally. Adherence to evolved quality and design standards and innovation are critical for success in some high-volume export markets. Additionally, a shift towards a more efficient, cost-competitive and sustainable manufacturing ecosystem is not attainable without parallel upskilling of the human resources involved.

Globally, and across the value chain, digital-induced disruption is imperative and early signs are visible. To maintain and improve global competitiveness, Indian manufacturing needs to accelerate the adoption of Industry 4.0. The business case for adoption will need to include improvement in quality and customer service level beyond cost optimisation. It is important to take into account specific nuances while we focus on Industry 4.0 adoption—brownfield acquisitions that have grown over time and become complex with respect to layout, material and process flow, the need for low-cost technology, etc. Leveraging the strength of India’s IT services sector and tapping the effusive entrepreneurial spirit evident throughout the burgeoning start-up sector potentially presents opportunities to provide the much needed boost for Industry 4.0 in India.

Multiple initiatives have been conceptualised and developed over the last 4-5 years to attract investment, encourage innovation, enhance skill development and build infrastructure to transform the Indian manufacturing sector. ‘Make in India’, ‘Skill India’ and ‘Digital India’ are all directed towards developing the right enabling ecosystem and a start has been made.

While policy and regulatory support are a must to set the foundation, it is imperative that, in parallel, industry drives operating efficiency to become more competitive such as in resource consumption-related parameters like specific energy consumption and labour productivity. Further, factors such as low power quality, logistics and freight expenses and poor transportation infrastructure, that have remained a challenge, require long-term engagement focusing on modal mix for freight movement, investing in updated transmission systems, strengthening roadways and exploring inland waterways as alternative modes of transport.
Global trade dynamics have had interesting developments over the last 3-4 years, actively and intricately linked with geopolitics. The rise of increased protectionism across key economies presents yet another challenge for Indian manufacturers looking to grow through the export route. India’s corporate taxes, land acquisition policies, border compliance regulation and cost of capital also continue to be key challenges, which add to the cost of doing business or often inhibit the ease of doing business. With a large number of schemes launched to encourage the opening of businesses and facilitation of their operations in India, it is important that the industry facilitates and aids the government through enhanced participation and ownership.

If Indian manufacturing is to achieve success on the final frontier, a concerted collaborative effort is required to be made by both the industry and government. This would include identifying specific, time-bound, actionable and measurable initiatives across the range of action areas that not only create the right enabling ecosystem but also ensure implementation and uptake by industry. Looking ahead, to meet the $1-trillion manufacturing GVA target, industry and the government need to work in perfect synchronisation with each other to unleash the true potential of India’s manufacturing sector.

Jain leads the industrial goods practice, Datta has expertise in operations and Gupta works across industrial goods clients at BCG India

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