GDP growth in India is expected to be spearheaded by growth in manufacturing in the decade coming up. As multinationals reassess India’s role in their Asia Pacific 2020 to 2025 portfolio, a discussion on India’s manufacturing outlook becomes inevitable. As a result, I created scenarios to highlight India’s manufacturing potential in the coming years, and would like to share the “base case” below.

FSG’s Base Case Scenario: India’s manufacturing output increases to 19 percent of GDP by 2020

As the global manufacturing landscape shifts, India is well suited to emerge as the global low cost manufacturing hub. This move is encouraged by the Indian government, with initiatives like the “Make in India” campaign, as it tries to attract foreign investment in the country. Despite the government’s aggressive push, we believe that the growth will be gradual, a rise to 19 percent in 2020 from the current 17 percent, which reflects the slow execution of reforms.

As a result, the Indian states will continue to play an important role, competing to attract investment through easier provision of land and better infrastructure development.

Stages in the manufacturing process

In the base-case scenario I believe India will aim to capture market in the basic research, application development and global production stages of the manufacturing process. India’s large number of universities and graduates make the country well suited for the basic research function of manufacturing, especially for low tech products. Additionally, proximity to customers will allow application development to take place in the country as well, since firms will be able to localize products for the large local consumer base. And finally, India could capitalize on its cheap labor to develop as a global production hub.

To attract more investment in the product research and early stages of manufacturing, the country will need to improve its regulatory framework, increase skills development and research funding, and reward innovation through better protection of IP rights.

How to capitalize on India’s manufacturing growth:

1. Evaluate the costs and benefits of manufacturing in India versus manufacturing elsewhere. You should consider manufacturing for local consumption as well as for exports. Use FSG’s three-tiered framework (below). Sourcing decisions will also be critical in choosing manufacturing locations.
2. Use FSG’s Manufacturing Attractiveness Index to prioritize states on manufacturing competitiveness as conditions in India vary dramatically by state. The index takes into account six factors namely industry conditions, economic conditions, infrastructure, costs, regulatory environment and development conditions.
3. Consider manufacturing in the sector-specific hubs in the country, based on the incentives provided by states and supplier/customer networks.

FSG’s insights on manufacturing in India

This update is the final post of a two-part series on assessing India’s manufacturing potential. These posts have been developed carefully based on FSG’s numerous interactions with clients and experts, and will have significant value for senior executives of western multinational companies operating in India.

For an in-depth analysis of this topic, FSG clients can access the full report on the client portal. Not a client? Contact us to learn more.