3 priorities to make India a manufacturing powerhouse

Covid-19 being a black swan event toppled the established systems and norms all around the world. The world was forced to pause momentarily and for businesses this pause was prolonged. This made enterprises to introspect their processes and root out the faults. As a result, in the reboot phase, companies have begun reimagining several business aspects and reconfiguring manufacturing and sourcing footprint in order to become more reliable and resilient by expanding to new geographies.

India is uniquely positioned to take advantage of these shifts, but India’s manufacturing sector must rise up to the challenge by overcoming several of its shortcomings that previously kept it from realizing its potential. According to a McKinsey article, the following three specific set of policy interventions could catalyze the growth of Indian manufacturing value chains, if implemented in conjunction with actions taken voluntarily by manufacturing companies themselves.

Raising productivity

To become a global player, India’s manufacturing value chains must increase their productivity to match the global standards of GVA output for every full-time-equivalent worker. India’s capital productivity and labor productivity are both quite low.

Indonesia’s manufacturing productivity is double in comparison to India, while the productivity of South Korea and China is about four times more. In certain sectors like electronic and chemicals manufacturing the disparity is astonishingly high, where South Korea is 18 times and 30 times (respectively) more productive.

Indian manufacturers could triple labor productivity and increase capital productivity by 1.5 – 2 times by embracing Industry 4.0 and adopting automation technologies, investing in analytics and reskilling and upskilling labors. Policy reforms that boost better infrastructure and encourage logistical proximity of suppliers can tremendously help Indian manufacturers to enhance productivity.

Indian manufacturers can also up their game by creating stronger brands that offer superior value-added goods, with higher quality, in better packaging. Such improvements would help them to get a higher price for their products, allowing GVA enhancement by 1.5 – 3 times. It will also increase the companies’ ROIC, attracting more capital and boosting profit that can be reinvested in the company.

Securing knowledge and technology

India’s less-developed manufacturing value chains lack the know-how and technology to compete with their global peers. Manufacturers belonging to this category should use acquisitions and alliances to source new technology.

The government can help with an additional approach – build a steady “framework of time-bound and conditional localization incentives” to attract global enterprises to establish manufacturing operations in India, with or without a local partner.

This approach would be especially beneficial to the Aerospace & Defense (A&D) value chain where the FDI limit has already been increased to 74% to relax the concerns of global defense companies about transfer of technology. The government can further capitalize on this by providing localization incentives and awarding local A&D manufacturing contracts.

The Indian government can provide additional support to “high-technology and low carbon value chains” through viability-gap funding (VGF), where it provides partial capital for making projects financially viable. It would boost local manufacturing of goods that are currently being imported by improving their ROI.

Accessing capital

India’s manufacturing sector accounted for 17.4% of India’s GDP in 2020, marginally more than 15.3% it contributed in 2000. The room for improvement is huge but the largest and most prominent obstacle is gaining access to adequate capital. To double its GDP, India’s manufacturing sector is expected to need about $1.0 trillion to $1.5 trillion of total investments over the period of next 7 years, provided Indian manufacturers are able to raise GVA capture by 25%.

Implementing financial reforms could help stable Indian manufacturers with good ROI attract domestic capital at lower cost from long-term saving pools like insurance and pension funds. However, other finance sources would also be required to fill the deficit. If India’s current FDI growth lingers and manufacturing is able to double its FDI share, then 25% – 30% of the required capital could come from FDI, over the next 7 years.

Japanese investors with their patience and long-term investment horizon are best candidates for this. Currently only 1.5% – 2% of India’s annual FDI come from Japan, hence with an aggressive push, their investment could see a phenomenal rise.

If these 3 policy level reforms are successfully implemented, along with adequate complementing from the private manufacturers, Indian manufacturing value chains can finally become most sought after suppliers to the global markets.