Despite its immense potential, India’s manufacturing sector has been the underachiever in the country’s growth story. India did not follow the traditional pattern of manufacturing-driven growth seen in other emerging markets. Instead, India’s service sector was the main catalyst for growth.
Now, with a renewed interest in India’s manufacturing potential across industries, the story is changing. Local companies are already manufacturing locally, and competition will only intensify over time.
“Organized” and “unorganized” manufacturing in India
India’s manufacturing sector is divided into the organized and unorganized sectors, which map into the formal and informal economy. The former contributes to two-thirds of the manufacturing output, but its share of manufacturing-sector employment is less than 20 percent, making it a capital-intensive sector. As a result, labor-intensive industries have now been highlighted as focus areas for growth in this sector.
Considering whether to “Make in India”
New incentives in Indian manufacturing come as a result of the government’s “Make in India” campaign and the National Manufacturing Policy (NMP). These policies aim to address the biggest concerns in the sector, which include a simplification of regulatory burden through e-Biz, the G2B portal for all central government permits. (States with a heavy focus on manufacturing will also likely shift their processes online in order to ease procedures and encourage investment.) Additionally, the easing of FDI policies has actively encouraged foreign investment in the India manufacturing sector, and the implementation of the Goods and Services Tax (GST) will also be hugely beneficial in improving efficiencies in the manufacturing sector.
These changes in India’s manufacturing sector are taking place against the backdrop of an evolving global manufacturing landscape. While developed countries like the U.S., Germany and Singapore continue to focus on high-skill manufacturing, a shift is taking place in emerging Asia. China’s focus is changing, from low- to medium-skill manufacturing, and wages are rising. This comes at a time when India and a number of ASEAN countries are in the process of industrialization.
This interplay of factors is hugely important for multinationals as it calls for an immediate re-evaluation of their manufacturing strategy. This is the time to consider whether it’s the right moment for your firm to “Make in India.”
FSG’s insights on manufacturing in India
This post is part one 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. Next week’s update: India’s manufacturing sector will be the silver-lining in the long-term.
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.