India is fast emerging as a powerhouse of global manufacturing. With the backing of a robust higher education system, a huge army of cheap skilled manpower (India produces about 400,000 engineers annually), and a history of manufacturing that goes a long way, the country has acquired what is needed in the areas of process, product and capital engineering.
These intrinsic advantages offered by India have led to a spurt in the entry of multinational companies; domestic companies scaling up their operations; and the expansion of the domestic market itself, thereby enabling the country’s manufacturing sector to undergo a revolution.
The manufacturing sector contributes 79 percent of Foreign Direct Investment (FDI) in India, and accounts for 27 percent of the country’s GDP. India’s prowess in this area has seen it becoming the second biggest small car market in the world, the largest diamond cutting and polishing center worldwide, the largest producer of tea, milk and pulses in the world, and one of the few countries manufacturing supercomputers indigenously. Of India’s total exports, manufacturing has a major share of 53 percent.
Ranked as the fourth largest amongst emerging economies, the country’s manufacturing base has witnessed more investments, as a percentage of GDP, than any other country, barring China. With the annual growth rate hovering between 4-6 percent in the initial years of the current decade, it has shot up to 9-12 percent per annum in the recent years. The growth of industrial production has been averaging an annual 8.8 percent during the last four years (from 2004 to 2008).
As per a study by the Centre for Monitoring Indian Economy (CMIE), the AMJ Quarter of FY 2008 saw the cumulative net sales of 2144 listed manufacturing companies rising by 33.9 percent.
In fact, automobile manufacturers, such as Hyundai (near Chennai) and Suzuki (in Gurgaon) have already made India their manufacturing and export hub. While Hyundai’s ‘i10’ is being rolled out only from India, Suzuki’s A-Star is also being manufactured exclusively in India. Both these cars are being exported across the world from here.
Other multinational companies that are beefing up their plans for India include Cummins, which intends to make India the manufacturing hub for its new line of generator; Samsung which is planning to pump $100 million in its plant near Chennai to transform it into a global hub; and Nokia which is infusing another $75 million in its manufacturing facility in Sriperumbudur.
Notable manufacturing companies in India include Tata, a diversified group with more than 90 companies, private sector petrochemical giant Reliance Industries, auto major Ford that sells more than 100,000 cars a year, FMCG player Pepsi, and leading pharmaceutical player Wockhardt.
Industry Evolution and Growth
At the time of attaining independence in 1947, India primarily had an agrarian economy with poor manufacturing capabilities. Thus, the task at hand for the government was to kick-start a stagnant economy.
India’s strategy for the manufacturing sector came to the fore in the second five-year plan, which laid emphasis on the heavy industries and sought a greater role of the public sector in industralisation. The result was that areas of high investment, such as arms and ammunition, transport, energy, coal, iron and steel and oil came under the government’s control.
The real thrust to the manufacturing sector came in the last decade of the 20th century. Facing huge trade deficits and an overvalued currency, the government decided to liberalise the economy. Subsequently, a new industrial policy was unveiled on July 24, 1991 that promised elimination of entry barriers; removal of restrictions of Monopolies and Restrictive Trade Practices Act on the domestic industry to facilitate its expansion; promotion of foreign direct investment in manufacturing facilities; and integration of the country’s economy with the global economy.
While these measures gave a push to the manufacturing sector, physical infrastructure failed to grow at the same pace, thereby keeping the Indian manufacturers at a disadvantage as against their global counterparts. Thus, those micro-verticals within manufacturing that did not rely too much on the physical infrastructure (such as garments, leather, gems and jewellery) displayed international competitiveness.
As the physical infrastructure began to improve in the first decade of the 21st century (with the government allowing 100 percent FDI in 2006 in several sectors such as airports, roads and ports), so did the other areas of the manufacturing vertical such as complex components, automobiles, petroleum refining, capital goods and engineering products and services.
The government continued to support the manufacturing sector through its policies and initiatives. Some of the initiatives adopted by the government included a five year tax holiday in such areas as power projects, export firms and units in electronic hardware and software parks; enabling access to inputs at competitive prices; reduction and rationalization of duty rates; execution of technology up gradation schemes in several sectors like food processing and textiles; implementation of the SEZ (Special Economic Zone) Act; and the initiation of the Delhi-Mumbai Industrial Corridor in collaboration with the Japan External Trade Organisation (JETRO).
Such steps were complemented by similar measures from the states and Union Territories like the Single Window Clearance mechanism and customized packages for capital- intensive projects.
The Indian manufacturers lapped up these sops extended by the government, and scripted some amazing success stories. For instance, Bharat Forge today ranks as the world’s second largest producer of crankshafts, axle beams and other forged auto components. Likewise, Tata Steel, post the acquisition of Corus, has come to be the fifth largest producer of steel worldwide. Suzlon enjoys the distinction of being the world’s largest wind turbine generator manufacturer.
Over the years, several key sectors in the manufacturing vertical have exhibited strong growth. For instance, the chemical industry is worth $30 billion, while the size of the electronic industry is $11 billion. The food processing and engineering industries are $70 billion and $20 billion in size respectively.
According to a report by McKinsey Global Institute, the fast growth in India’s economy would see the country emerging as the fifth largest consumer market worldwide by 2025. Similarly, it is expected that by 2025, the consumer spending will quadruple to $1.5 trillion riding piggyback on the three-fold rise in household income and a ten-fold jump in the middle class population.
According to a study by iMaCS (ICRA Management Consulting Services Limited), the investment in infrastructure (roads, ports and airports) is expected to touch $125 billion by 2010.
Indirect taxes would be eliminated once state VAT (Value Added Tax) is implemented and an integrated Goods and Service Tax (GST) is introduced. As improve duties are further reduced, indirect taxes in India will come at par with those in China and ASEAN (Association of Southeast Asian Nations).
Once the SEZ become operational, India would become an attractive destination for export-driven manufacturing hubs in several industries. The country could soon see setting up of Manufacturing Investment Regions just as there are Petroleum and Petrochemicals Investment Regions.
As per a study conducted by the consultancy firm Capgemini in 2007, which included responses from 340 manufacturing companies across the world, over the next three to five years, India would threaten China as the world’s top manufacturing destination. The study said that offshore manufacturing activities will surpass the overall outsourced BPO and IT activities.
Yet another study by the National Manufacturing Competitiveness Council in 2007 forecasts a growth of 12-14 percent over the next decade for the Indian manufacturing sector with pharmaceutical, auto and food processing industries pushing growth.