Unpacking India’s Ascent as a Global Manufacturing Hub: A Comprehensive Cost-Benefit Analysis
The global manufacturing landscape is in constant flux, and India is rapidly emerging as a formidable player, positioning itself as a significant manufacturing hub. Driven by robust government initiatives and a dynamic manufacturing industry, the nation is attracting global companies looking to optimize their manufacturing operations and diversify supply chains.
This blog post delves into a comprehensive cost-benefit analysis of manufacturing in India, exploring why the country is becoming an increasingly attractive destination for production in India and export.
The Momentum: India’s Growing Manufacturing Prowess
India’s manufacturing industry is a cornerstone of its economy, contributing significantly to its GDP and employment. The sector currently contributes around 17% to the nation’s GDP and employs over 27.3 million workers. The Indian government has ambitious plans, aiming for manufacturing to contribute 25% of the economy’s output by 2025.
This ambition is backed by tangible results. India’s manufacturing exports have seen remarkable growth, registering the highest ever annual exports of US$447.46 billion in FY23. The country is on a trajectory to potentially export goods worth US$1 trillion by 2030. The COVID-19 pandemic, while challenging, also served to highlight India’s manufacturing capabilities, particularly in pharmaceuticals and vaccines, shifting global perceptions. Although India’s current share of global manufacturing is 2.87% its growth trajectory is steep and promising.
The Cost Advantage: Why Manufacturing in India Makes Financial Sense
A key driver for global companies considering manufacturing in India is the compelling cost analysis.
A. Competitive Labour Costs: India offers significantly lower labour costs compared to many other manufacturing destinations. For instance, the monthly minimum wage in India was around US$59 (till 2023), compared to US$286 in China. This, coupled with a vast and trainable workforce, presents a substantial landed cost advantage for labour-intensive manufacturing operations.
B. Government Support and Incentives: The Indian government has rolled out numerous initiatives to bolster the manufacturing industry. New manufacturing units incorporated on or before March 31, 2024, were eligible for a reduced corporate tax rate of 15%. Furthermore, Production Linked Incentive (PLI) schemes are in place across 14 key sectors, including electronics, pharmaceuticals, and automobiles, providing financial incentives tied to incremental production. These schemes have notably boosted mobile and electronics manufacturing, making India the second-largest mobile manufacturer globally. State governments also compete to attract investment by offering customized subsidies and preferential industrial policies. The overarching “Make in India” initiative is central to this supportive ecosystem.
C. Improving Ease of Doing Business: India has made significant strides in improving its ease of doing business. The government has focused on streamlining regulatory processes, introducing single-window clearance systems, and liberalizing Foreign Direct Investment (FDI) rules. This has simplified setting up and running manufacturing in the country.
D. Infrastructure Development: Recognizing the critical role of infrastructure, the Indian government has significantly increased its capital expenditure. For FY2024-25, capital expenditure on infrastructure development was revised to INR 11,110 billion (US$133.3 billion). This investment is channelled into developing industrial parks, Special Economic Zones (SEZs) offering tax benefits, and improving overall connectivity.
Beyond Costs: Strategic Benefits of Manufacturing in India
While cost is a major factor, India offers several other strategic advantages for large-scale manufacturing.
A. Skilled Workforce and Demographics: India possesses a large pool of well-trained workers, particularly valuable in skill-intensive value chains such as pharmaceutical formulations, capital goods, and automotive components. The country’s young and educated population is a significant demographic dividend.
B. Large and Growing Domestic Market: Setting up production in India provides direct access to one of the world’s largest and fastest-growing domestic consumer markets. This internal demand can de-risk investments and provide a stable base for manufacturing output.
C. The “China Plus One” Strategy: Many global companies are actively pursuing a “China Plus One” strategy to diversify their supply chains and reduce geopolitical risks. India is emerging as a preferred alternative due to its geopolitical stability and improving manufacturing capabilities.
D. Robust Ecosystem and Capabilities: India has established strengths in diverse sectors like pharmaceuticals, chemicals, industrial machinery, electronics, automobiles, and textiles. There’s a noticeable rise in foreign technical collaborations and R&D partnerships. Increased merger and acquisition (M&A) activity further signals growing investor confidence in India’s manufacturing industry.
Navigating Challenges in India’s Manufacturing Landscape
Despite the positive outlook, businesses should be aware of certain challenges:
A. Input Costs and Import Dependency: High input costs can sometimes affect value addition in the manufacturing industry. Dependency on imports for certain raw materials and intermediates can also expose businesses to global price fluctuations. A suggested measure to counter this is a streamlined tariff regime.
B. Regional Imbalances: A significant portion of India’s manufacturing Gross Value Added (GVA) is concentrated in a few states like Maharashtra, Gujarat, and Tamil Nadu. Addressing this requires continued state-level reforms and promoting investments in currently underserved regions to unlock the full potential of manufacturing in the country.
C. Need for Continued Focus: To maintain global competitiveness, Indian manufacturers must consistently focus on developing cutting-edge products, enhancing productivity, and implementing advanced technology. Increasing women’s participation in the manufacturing workforce is another area that could significantly boost manufacturing output.
Government Initiatives Fuelling the Manufacturing Engine
The Indian government’s proactive stance is a critical enabler for the growth of global manufacturing in the country. Key initiatives include:
- “Make in India” Campaign: Launched in 2014, this flagship initiative aims to transform India into a global manufacturing powerhouse by focusing on 25 key economic sectors, encouraging both domestic and foreign investment.
- Production Linked Incentive (PLI) Scheme: This scheme is designed to boost domestic manufacturing capabilities and attract large-scale manufacturing by offering incentives on incremental sales across 14 key sectors.
- FDI Liberalization: India has progressively liberalized its FDI policy, attracting substantial foreign investment. Total FDI inflows in FY 2023-24 stood at US$17.96 billion.
- National Manufacturing Policy: This policy aims to increase the manufacturing sector’s share in the nation’s GDP and create employment opportunities.
- Other Measures: Public procurement orders favouring domestic manufacturers and the Phased Manufacturing Programme (PMP) further support local production in India.
The Future Outlook: India as a Sustained Global Manufacturing Hub
The outlook for India’s manufacturing industry is overwhelmingly positive. Experts anticipate that India could export goods worth US$1 trillion by 2030 and potentially add more than US$500 billion annually to the global economy by that year. There is a growing focus on smart manufacturing, adopting green manufacturing practices, and integrating advanced technologies like AI and IoT.
Continued commitment from the Indian government towards reforms, infrastructure development, and fostering a business-friendly environment will be key to sustaining this momentum.
Is India good with engineering exports?
Yes, engineering goods are a significant component of India’s manufacturing exports. For instance, from January to June 2022, engineering goods were among the top ten major commodities exported. The “Make in India” initiative and PLI schemes also strongly support sectors like capital goods and advanced automotive technologies, further boosting engineering export potential.
Can you work with Indian suppliers to develop your products?
Absolutely. India offers a growing ecosystem for foreign technical collaborations, joint research and development opportunities, and contract manufacturing. Many Indian firms are actively entering into joint ventures to build or scale up local production in India, catering to both domestic and export markets with enhanced manufacturing capabilities. The country’s strengths in sectors like automotive components, pharmaceuticals, and electronics demonstrate a solid capacity for collaborative product development.
What documents do you need to import from an Indian manufacturer?
- Importing goods from an Indian manufacturer involves standard international trade documentation. While specific requirements can vary based on the product and destination country, typical documents include:
- Bill of Lading / Air Waybill
- Commercial Invoice cum Packing List
- Shipping Bill / Bill of Export (customs declaration)
- Certificate of Origin (to ascertain the country of origin)
- Letter of Credit (if this is the payment term)
- Import License (if applicable for specific restricted goods in your country)
- Insurance Certificate
- Inspection Certificate (if required by the buyer or importing country regulations)
- It is always highly recommended to consult with a customs broker or a freight forwarder in your country to get precise, up-to-date information tailored to your specific import needs.
Conclusion
India presents a compelling case as an emerging global manufacturing hub. The combination of significant cost analysis advantages, a large and skilled workforce, substantial government support through various initiatives, and a growing domestic market makes manufacturing in India an attractive proposition for global companies.
While challenges exist, the proactive approach of the Indian government and the inherent strengths of the manufacturing industry position India for sustained growth in manufacturing output and exports. For businesses looking to diversify, optimize, and tap into new growth avenues, India’s manufacturing sector warrants serious consideration. Come, work with team Four Turrets to create your new supply chain with Indian manufacturers.