New Delhi: Indian manufacturing is undergoing a paradigm shift, breaking new grounds amidst geopolitical conflicts and global headwinds which, while pulling down growth worldwide, are creating favourable dynamics for India as it takes on the G20 presidency. Importantly, India’s stewardship of G20 lends substance to India’s strategy to weather the global slowdown with a rising share of global manufacturing and the government’s ambition to harness this power to transform into a USD 5trillion economy. The importance of manufacturing in this vision has been underlined by Finance Minister Nirmala Sitharaman’s call to industry to use the “suspected long drawn recession as an opportunity for many of the investments which are now looking for a different place and to work on strategies for drawing those manufacturers to India”.
The optimism over prospects of India’s manufacturing is not misplaced. India surpassing the United Kingdom to become the fifth largest in the world presents a strategic opportunity to expand its economic heft, with government policies increasingly being tailored towards supporting and expanding the economy’s manufacturing footprint, according to Radhika Rao, Senior Economist, DBS Group Research. Industrial activity improved this year, reflected in higher capacity utilisation rates in India’s manufacturing sector, which as per a FICCI survey, stood at 72.0% in the second quarter of FY22, indicating significant recovery in the sector. These have enhanced the competitiveness of India’s domestic manufacturing along with initiatives like Atmanirbhar Bharat, Make-in-India, National Single Window System and an expanding production-linked incentive scheme worth Rs 1.97 trillion for 13 critical sectors over a 5-year period, positioning India the third most sought-after manufacturing destination in the world.
India, however, still has some distance to cover to become a manufacturing powerhouse. According to DBS Research, majority of FDI inflows are still in services sectors due to liberalisation and regulatory reform and not as much in manufacturing. The situation could change with propitious geo-strategic shifts, feel policymakers. Notably, the rising scope of outsourcing on account of China Plus One strategy of diversifying manufacturing and production to new locations which has gained momentum since the pandemic with multinationals looking at India as a viable alternative to China. The manufacturing sector attracted Foreign Direct Investments (FDI) worth USD 21.34 billion in 2021-22, an increase of 76% year-over-year, Commerce Ministry data shows. With all this, manufacturing sector of India has the potential to reach US$ 1 trillion by 2025.
The manufacturing push finds a key enabler in the Government’s focus on resilient supply chains which could be an ignition to lift the Indian economy towards its goal of $5trn nominal GDP from estimated $3.4trn this year. India has anyway established a place in global supply chains, supplying the world in the IT, automotive and pharmaceuticals sectors and also has expertise in multiple other areas such as chemicals, electronics and software. As the new G20 chair, India with a more automated, process driven, efficient manufacturing is well-placed to integrate more closely into value chains for addressing global as well as domestic markets with global trade conflicts and protectionist policies exposing the fragilities of existing global value chains and prompting firms to widen the net for fresh new potential sources. This opens up a good opportunity for India to enter the fray to attract part of these capacities, according to Rao.
For instance, Foxconn, Apple’s main iPhone assembler, has been shifting more of its manufacturing capabilities to India, including part production of iPhone 14 handsets, to be sold domestically and for exports. In April 2021. Samsung Display Noida has invested US$ 650.42 million (R. 4,825 crore) to move its mobile and IT display manufacturing plant from China to Uttar Pradesh. China’s strict Covid rules and delayed reopening is also expected to be a catalyst for major firms to diversify to India, besides selected ASEAN economies, adds Rao. Going ahead, FICCI recommends a sharper focus on supply chain resilience by growing India’s presence in five to six specific global value chains like electronics, chemicals, medical devices in its “India’s Century” report partnered with McKinsey & Company. This can be done by developing port-proximate clusters like the Mumbai-Thane-Raigad cluster for electronics and chemicals.
With India’s key development partner Japan occupying the headroom in G7, the jugalbandi augurs well for the manufacturing sector. “India and Japan assuming the prestigious G-20 and G-7 presidencies respectively, places the two nation at a critical juncture for further strengthening their global and strategic partnership by way of proactive engagements in trade and investment,” as Hiroshi Suzuki, Ambassador of Japan to India, said recently at a CII event. Japan has already poured in USD 38.13 billion FDI into automobiles, electronics system design and manufacturing, medical devices, consumer goods, textiles, food processing and chemicals between April 2000 to September 2022, according to industry data. According to Ambassador Suzuki, more than 70% of Japanese companies surveyed recently have intent to expand business or are considering new investments within the next few years—the highest percentage among Japanese companies interviewed in various countries—amidst high expectations of the Indian market as Tokyo looks to achieve the goal of 5 trillion Yen investment in financing in the next five years.
Then, there are huge sectoral opportunities to excite investors from G20 like petrochemicals which has a market size in India of about US $190 billion and ability to contribute 10% to the incremental growth of global petrochemical demand. Currently, petrochemical production accounts for nearly 14% and 8% of the global demand for oil and gas, respectively. The Indian Cellular and Electronics Association (ICEA) predicts that India has the potential to scale up its cumulative laptop and tablet manufacturing capacity to US$ 100 billion by 2025 through policy interventions.
However, constraints still remain as manufacturers in the country have been slow to transition to the use of advanced technologies, as per the FICCI report and are also burdened by a high cost of compliance as India requires 2,000 compliances compared with 300 to 500 in comparable Asian economies. As a result, India’s manufacturing productivity lags behind its peers with Indonesia’s output twice that of India’s while China’s and South Korea’s are four times higher. While the ball lies in Government court where ease of doing business is concerned, initiatives like sharing of technology licences and knowledge by large companies and conglomerates can help bridge technology issues.