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Can India emerge as a global manufacturing hub beating China?

No doubt that the pandemic laid bare the vulnerability of existing global manufacturing supply chains. It is likely to lead to global suppliers rethinking the resilience of their supply chain networks. Can India take advantage of this opportunity to bolster its industrial and commercial base? In this article, we shed light on India’s manufacturing lag and discuss the various policy initiatives taken by India to strengthen its manufacturing sector.

Can India emerge as a global manufacturing hub beating China?

1. What is India’s current status as global manufacturer?

The pandemic has revealed the inherent weaknesses in the existing global supply chain and the over-reliance on China’s manufacturing industry. Prime Minister Narendra Modi has called on the Indians to seize the chance presented by the disruption to global supply lines. The Atmanirbhar Bharat Abhiyan (Self-Reliant India Movement) launched by Prime Minister Modi in May 2020 is aimed at merging the global with the local, generating manufacturing investment, and becoming the new global nerve centre of multinational supply chains in the post-COVID world. However, despite long-term aspirations to become a high-value manufacturing hub, India remains lagging in this area. The pandemic presents new opportunities for India to rethink its national industrial strategy, especially policies concerning the growth of its manufacturing sector. This leads to the question: can India position itself to take advantage of the opportunity that avails to be the next global manufacturing hub?

According to the United Nations Industrial Development Organisation (UNIDO), in 2019, India ranked 42 out of 152 countries, with manufacturing value added (MVA constant 2015 US$) totalling $430.25 billion, or equal to 15.5 per cent of its gross domestic product (GDP). At the same time, China ranked second with MVA (constant 2015 US$) of $4105.87 billion or equal to 28.8 per cent share.

2. Where is India lagging in manufacturing?

There are several reasons why India lags in the manufacturing sector. China has outperformed India, especially in areas critical to boosting manufacturing output such as starting new businesses, access to electricity, registering property, and performance in enforcing contracts.

Pre-COVID, in 2019, China’s FDI inflow stood at US$ 140 billion, whereas that of India’s stood at $49 billion. India liberalised its economy just over a decade after China in 1991, but the move was more cautious than that of China’s, accompanied by sectoral caps. It was only in June 2017 that India abolished the Foreign Investment Promotion Board (FIPB), an inter-ministerial board that granted prior governmental approval in mandatory sectors. Currently, India allows FDI with foreign equity ownership up to 100 per cent through the automatic route for all sectors except for a few prohibited sectors.

3. India’s performance vis-a-vis China

India’s bureaucratic setup, however, continues to mire foreign companies due to weak legal and regulatory systems. In addition, land, labour and law largely fall under the State List, which foreign companies see as further hurdles as each state may use different systems of approval. India is still being flagged out for its complex regulatory environment. In contrast, China’s leaner regulatory environment has been far more flexible at the state and regional levels. India also continues to see a lack of investment in connectivity and in both physical and digital infrastructure development. This includes roads, highways, ports and electricity generation. Most of India’s manufacturing items are still transported using ground transport. Meanwhile, China has heavily invested in digital infrastructure development, especially in broadband connectivity. Until 2001, China and India had similar numbers of broadband users. However, after this point, China’s numbers exploded. Similarly, Internet users as a percentage of population for China drastically increased after 1998. China has invested in digital infrastructure to ensure upward social mobility, access to education, and in creating a better quality of life for its people, resulting in a workforce now able to contribute effectively to the economy and the high-value manufacturing sector. India has a pool of cheaper labour resource compared to China and other Asian countries, but the state and businesses have not channelled investments into the necessary human capital development to undertake high-value manufacturing activities.

India is also dependent on China for specific critical components. The cell phone industry, for instance, imports approximately 75 per cent of its components from China, with only 12 per cent being manufactured domestically. India has been less successful in developing industrial clusters focussed on research and development (R&D) and a diverse and high-quality supplier base, both of which are vital for enabling the growth of an advanced manufacturing and innovative technology sector.

4. India’s manufacturing policy plans

The Indian Government is working for the ease of doing business and luring FDI into the country. In fact, since the outbreak of the COVID-19 pandemic, it has announced several measures and offered various incentives to attract global investment.

India’s journey in bolstering its manufacturing sector had been challenging, yet beset with opportunities. India has consistently pushed for policy reforms to increase the country’s manufacturing output that lingered at 15–16 per cent of the total GDP since the 1980s. Although India has introduced industrial policy reform since 1948, the 1991 reform was most significant in driving structural shift, enabling the private sector to assume a much larger role in all sectors of the economy. In 2011, the Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce and Industry introduced the National Manufacturing Policy (NMP). Its main objective was to enhance the share of the manufacturing sector in GDP from 16 per cent to 25 per cent by 2022, create 100 million jobs and support required skills development programmes. Other key objectives of the NMP included the creation of national investment manufacturing zones (NIMZ), development of small and medium enterprises (SMEs), implementation of industrial training and other skill upgradation measures, promotion of green manufacturing as well as rationalisation and simplification of business regulations.

5. What has the Centre done so far?

In September 2014, Prime Minister Modi launched the “Make in India” initiative to renew focus on 25 key sectors ranging from automobiles to information technology and business process management (BPM). The initiative is built on four pillars: policy initiatives and new processes, robust infrastructure, focus sectors, and a new mindset approach. In May 2017, the Ministry of Defence’s Defence Acquisition Council approved the “Strategic Partnership” model which enables private companies to tie up with foreign players in manufacturing high-tech defence equipment such as submarines, fighter jets, helicopters, and armoured vehicles in India.

The most recent policy initiative, announced by Finance Minister Nirmala Sitharaman on May 17, 2020, under the Atmanirbhar Bharat Abhiyan (Self-Reliant India Movement) launched by Prime Minister Modi on May 12, targets reforms across seven sectors while emphasising self-reliance based on five pillars: economy, infrastructure, system, vibrant demography, and demand. All these initiatives are an attempt to push for high-value manufacturing activities to be moved to India. For example, the government launched a Phased Manufacturing Programme (PMP) aimed at increasing the number of smartphone components produced domestically and to invigorate the mobile handset manufacturing industry. India has recently invested in several high-profile manufacturing sectors. In February 2019, the Union Cabinet passed the National Policy on Electronics (NPE) which targets $400 billion worth of electronics manufacturing outcome for India by 2025.

Further, on May 12, 2020, Prime Minister Modi also announced a special stimulus package of Rs 20 lakh crore, which equals to 10 per cent of India’s GDP, aimed at making India independent against tough competition in the global supply chain. On May 17, Finance Minister Sitharaman announced detailed economic measures that included increased borrowing limits for state governments, from three to five per cent of the gross state domestic product; privatisation of public sector enterprise (PSEs), except in strategic sectors; and various incentives for micro, small and medium enterprises (MSMEs). The series of policy reforms and notable improvements in the business regulatory framework has had a tremendous impact on the development of India’s ability to attract FDI and trade in the manufacturing sector.  In fact, the World Bank’s Doing Business 2020 report ranked India as one of the 10 most improved economies in terms of ease of doing business score, especially due to reforms in paying taxes, trading across borders, and resolving insolvency.

India has a huge young demographic, between 40-60 per cent of the country’s population, which requires jobs. India would have to commit to more policy reforms to be able to further scale up its manufacturing capacity. It must continue to significantly invest in the development of physical infrastructure and digital connectivity—high-speed train networks, new airports, seaports, roads, and broadband.

6. India needs to upgrade education sector

India also needs to liberalise its education sector and invest in international education and research partnerships. These efforts should be fortified by a government-led public-private partnership investments in R&D, innovation, entrepreneurship, and the strengthening of the industrial supply-chain in high-value manufacturing sectors.

To support industrial clusters, India must consider prioritising investment into alternative renewable energy sources, such as solar and wind power. Currently, India is struggling to provide cheap access to electricity and clean water. Cheap renewable energy can generate capability and reach remote rural areas across the country; the surplus can be used for electric vehicles, such as scooters and rickshaws, which can then be locally produced for domestic and export markets. At the same time, these green technology related energy management initiatives will also address externalities such as high levels of carbon emission, pollution, and poor air quality and contribute towards sustainable manufacturing.

Additionally, there is a need to improve and follow-through India’s regulatory reforms. India can also introduce incentives to encourage advanced technology innovations in areas such as 3D printing and automotive real-time processes in manufacturing. Last, but not least, the Indian small and medium enterprises (SMEs) sector should be incentivised to become internationally competitive and export-driven. Both state governments and the central government must coordinate and introduce incentives that will draw FDI at regional levels, as has been seen in Telangana and Tamil Nadu. The government needs to further reduce red tape and overly complex approval processes and promote innovative and efficient business processes.

7. India has potential, it needs to do right

India can emerge as the next global manufacturing hub. A swift government intervention through strong fiscal response and injection of capital into the economy is necessary. The government must see this as an opportunity to strategically invest in high technologies for priority sectors. It should inject aggressive economic incentives and review the current business practises to bring in more trade and investments into advanced manufacturing sectors.

At the same time, the commercial sector, especially electronics and electrical sectors, must be incentivised to attract FDI from global electronic component manufacturers, review existing business models, and invest in upskilling and retraining as a move to enhance overall industrial capability and capacity. India should now turn to greater public-private partnership collaborative model, where the government and industry take collective responsibility for promotion and growth of the Indian manufacturing sector. Finally, India should capitalise on its diaspora and international industrial partnership programmes.

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