The slow and steady manufacturing Renaissance of India
Published on : Thursday 01-08-2024
The government’s reforms agenda, targeted at manufacturing, has helped it make substantial progress in recent years.
August 01, 2024 – A veritable renaissance appears to have taken hold of manufacturing in India, aided by policy reforms that have turned the climate favourable. This is for domestic manufacturing and exports in traditional and emerging sectors alike.
India’s efforts towards becoming a global manufacturing hub are integral to its goal of becoming a $5 trillion economy. And this bodes well for the manufacturing ecosystem and stakeholders at large. More importantly, these mark a break with the past.
To be sure, India’s growth path has not been linear. Many developed and developing countries transitioned from agriculture to manufacturing to services to move ahead. However, India’s growth largely bypassed the manufacturing stage, jumping directly from a predominantly agrarian economy to a services-led one. The acceleration in growth was also delayed and picked up only after the liberalisation of the economy in 1991.
In fiscal 1950, agriculture and services contributed ~52% and 33% of gross domestic product (GDP), respectively. But by fiscal 2024, agriculture's share had decreased to a mere 14%, while services had expanded to 66%.
In contrast, China and Japan achieved high growth in the manufacturing sector, riding on government initiatives, reforms and comprehensive policy support. Other Asian economies such as South Korea and Vietnam, too, have been driving their reform agenda, opening their economies, setting up specialised zones for manufacturing and other initiatives, which have given a leg up to their manufacturing sectors.
India has come to the table a little late in the day. The government’s reforms agenda, targeted at manufacturing, has helped it make substantial progress in recent years. Recognising the crucial role that manufacturing plays in creating jobs, the government has taken several initiatives to enhance India’s competitiveness through policy support.
At 27.7%, the share of manufacturing in GDP is the highest for China among Asian economies, aided by several reforms pursued as outlined above. Similarly, Vietnam has witnessed significant progress in manufacturing, where govt policy initiatives have played a vital role, leading to manufacturing accounting for ~25% of its GDP. The higher share of manufacturing also drives healthy employment.
This is evident in the share of manufacturing in employment for China and Vietnam. India’s share of manufacturing, in contrast, remained range bound at 15-18% in the past two decades. In recent years, India has implemented numerous reforms to enhance its competitiveness in the manufacturing sector. Manufacturing-focused initiatives such as Make in India and the production Linked Incentive (PLI) Scheme focus on ease of doing business, increasing foreign direct investment (FDI) and boosting local sourcing norms. These reforms have driven India's manufacturing sector, resulting in a 57% increase in foreign direct investment (FDI) equity inflow in manufacturing from 2014 to 2022. The Phased Manufacturing Programme encourages domestic production, reducing reliance on imports.
The Semiconductor Mission enhances technological capabilities through indigenous semiconductor fabrication. The Make in India initiative has successfully attracted foreign investments across various sectors. For instance, Taiwanese tech giant Foxconn will invest $1.67 billion in its upcoming facility in India. Additionally, Vietnamese automaker VinFast has commenced constructing its plant with an expected investment of $2 billion. Such initiatives collectively strengthen India's manufacturing competitiveness and economic growth.
Given the spate of reforms in the manufacturing sector, the contribution of manufacturing to India’s GDP, which was stagnant between 15% and 18% over the past two decades, is set to rise to ~25% by fiscal 2030. Manufacturing GDP growth stood at 8% over fiscals 2001-2010 and 6% over fiscals 2011-2020. This is now projected to reach ~9% over fiscals 2023-2030, and eventually culminate in the 25% contribution to India’s GDP target, supported by the policy push and realignment of supply chains.
The capex for the manufacturing sector was ~$264 billion over fiscals 2019-2023, averaging $53 billion annually. Over this period, PLI and emerging sectors accounted for only 5% of the $264 billion total capital expenditure (capex) with traditional sectors such as commodities, automobiles and pharmaceuticals making up the rest. However, aided by the green transition, supply chain re-alignment, focus on emerging sectors and benefits under the PLI scheme, the emerging sectors are projected to account for ~27% of capex over fiscals 2024-2028.
Further, the average annual capex is expected to grow ~40% to ~$74 billion annually between fiscals 2024 and 2028. Notably, heightened investment interest is evident across various emerging sectors, suggesting their pivotal role in domestic manufacturing, fuelled by the necessity for substantial capex.
Specifically, three segments – electric vehicles (EVs), semiconductors, and electronics – are anticipated to attract the bulk (85-90%) of non-PLI emerging-sector capex. The transition toward sustainable energy sources and the establishment of semiconductor hubs in India are poised to drive this momentum further.
To be fair, most of these reforms are structural in nature and it will take time for the benefits to be visible across sectors.
This document – Access India Equity Insights – has been prepared by ASK Capital Management Pte Ltd (and affiliates, ‘ASK’) for general information purposes only. To learn more about ASK’s investment strategies, please write to: [email protected]
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