The Indian Prime Minister launched the Make in India program aimed at reviving manufacturing in India on 25th Sep’14. In a series of reports starting with this one, we attempt to identify sectors and companies that stand to benefit from a possible manufacturing revival in India. We study the global competitive position of India across sectors to identify those sectors where India has a global competitive advantage in manufacturing and hence, where we expect the goods to be made in India.
What are the benefits of Manufacturing in India ?
Manufacturing accounted for 12.9% of India’s GDP in FY14 down from 16.1% in FY07. Given the expected huge influx of working age population in India (~110mn in the next decade) and a large part of it unskilled/semi-skilled, growing a large manufacturing base to drive employment is imperative for India if it has to turn its demographic bulge into demographic dividend. A buoyant manufacturing sector will also reduce pressure on the trade deficit which has risen nearly ten-fold in a decade to US$136bn (c.7% of GDP) in FY14.
Wage costs in India are now 1/3rd of that in China (unadjusted for productivity) and along with the ample availability of labour is a big force driving a shift in manufacturing to India.
In addition to labour, we map the competitive positioning of India in eleven sectors on the basis of energy, raw material / supplier ecosystem, size of domestic market, and tax / regulatory set up to come out with a set of industries that could benefit from a manufacturing revival in different stages. We classify these into “leaders” (rising share of global trade) “aspirants” (Import displacement first, exports later) and “laggards” (sectors with significant headwinds for now). The manufacturing sector growth would be led by both “Import displacement” in a
growing domestic market as well as rising share of global exports
Leaders – Pharma, Auto ancillaries, Textiles & Apparel and Gems & Jewellery
Aspirants – Rubber & Plastics, Non-auto related engineering goods, Electrical equipment & appliances and Food Processing
Laggards – Fertilizers and Electronics
Even as labour costs are important in global sourcing decisions, India has much catching up to do with respect to
its archaic infrastructure, complex taxation framework and policy (flexible labour laws, ease of doing business through lesser procedures, land acquisition laws, bureaucratic red-tape, etc.). Access and cost of raw materials
is a constantly evolving situation and has the potential to break the initiative.