The Indian manufacturing sector is currently experiencing substantial transformations driven by a convergence of factors including evolving skill requirements, government policies, technological advancements, and global trends. Its significance in shaping a country’s GDP and generating employment opportunities cannot be overstated.
To adapt to the evolving landscape, numerous multinational companies are strategically implementing the ‘plus one’ strategy. This approach involves diversifying production and supply chain operations, thereby reducing dependence on manufacturing solely in one country or geography.
India’s manufacturing sector is poised for significant growth, attributed to a combination of factors such as a large and youthful population, a rapid digital revolution, increasing urbanization, and a favorable business environment.
India’s manufacturing sector stands out as a promising powerhouse for several compelling reasons:
Government Initiatives: The Indian government has introduced the Production Linked Incentive (PLI) scheme, a strategic move to attract investments in critical manufacturing segments such as automotive, semiconductor, mobile phones, green energy, and more. This initiative serves as a catalyst for industry growth.
Global Investments: Several global industry leaders have committed substantial investment plans in India, establishing new manufacturing sites. This trend not only enhances reliability but also adds resilience to India’s manufacturing ecosystem, making it an attractive destination for multinational corporations.
Reform-driven Organizational Growth: Ongoing reforms, including the implementation of the Goods and Services Tax (GST), the establishment of a robust digital payment system, and other systemic changes over the past few years, have contributed to the industry’s enhanced organization. These reforms have streamlined processes and fostered a more efficient business environment.
Geopolitical and Economic Trends: India is strategically positioned to capitalize on the current geopolitical and economic trends driving the diversification of Asia’s manufacturing supply chain. With a substantial working-age population and a well-established digital infrastructure, India emerges as a singular market offering a scale comparable to that of China in the long term.
Competitive Labor Market: Boasting a population of approximately 1.4 billion, India is not only the world’s most populous country but is also undergoing a demographic boom. This demographic dividend contributes to a competitive and dynamic labor market, providing a significant advantage for manufacturers in terms of scale and diversity.
The “China +1” strategy has emerged as a pivotal paradigm shift for global companies that historically made substantial investments in China over the past three decades. The allure of China’s low labor and manufacturing costs, coupled with its expansive consumer market, resulted in a concentration of business interests in the country.
The China+1 strategy gained momentum swiftly, driven by the US-China trade war, escalating political uncertainties in China, and the supply chain disruptions induced by the COVID-19 pandemic. Faced with these challenges, global companies sought to diversify their operations beyond China to mitigate risks and enhance resilience.
The “China +1” approach presents a significant opportunity for India. Notably, between 2015 and 2021, China’s share in US imports experienced a decline of 367 basis points, whereas India’s share witnessed a notable increase of 58 basis points. This shift underscores India’s growing prominence as an attractive alternative for global businesses seeking to diversify their supply chains and reduce dependence on a single manufacturing hub.
Aggressive Government support and policy reforms
India’s manufacturing landscape is experiencing a robust transformation, driven by proactive government support and policy reforms. The National Manufacturing Policy, with its ambitious goal of elevating manufacturing’s GDP share to 25% by 2025, serves as a guiding force in shaping the sector’s trajectory.
At the forefront of this initiative is the ‘Make in India‘ campaign, spanning 25 economic sectors. Complemented by the Production Linked Incentive (PLI) scheme, offering substantial incentives ranging from 4-6% on incremental sales, these programs present a compelling proposition for new business ventures. The strategic alignment of these initiatives underscores the government’s commitment to fostering a conducive environment for industrial growth.
The impact of these concerted efforts is vividly evident in the remarkable growth of India’s manufacturing sector, which surged by an impressive 210% in FY22. This surge not only attests to the effectiveness of the government’s policies but also highlights the attractiveness of India as a destination for businesses looking to thrive in a supportive and incentivized manufacturing ecosystem.
Over the last two decades, the manufacturing sector has experienced a significant decline in market share within GDP and stock market indices, losing ground to the service sector. Despite confronting numerous crises, the manufacturing sector has demonstrated improvements in key structural indicators such as return on capital employed (ROCE), working capital investment, and cash flow utilization.
Looking ahead, with unforeseen expansion anticipated in manufacturing over the next few years, driven by both domestic consumption and exports, there is a potential for the revival of the manufacturing sector. Over the next 5-10 years, the manufacturing sector has the opportunity to reclaim lost market share, both in GDP and equity indices. This resurgence is contingent upon sustained positive trends in structural data and the sector’s ability to capitalize on emerging opportunities in the evolving economic landscape.
