India is becoming one of the most sought-after manufacturing hubs globally. According to real estate consultant Cushman & Wakefield, India’s increased popularity may be attributed to its cost competitiveness and operating conditions.
Based on the firm’s 2021 Global Manufacturing Risk Index, India overtook the US to become the second most attractive manufacturing destination. The index, which assessed 47 countries in Europe, the Americas, and Asia-Pacific, placed India behind only China ahead of the US, Canada, and the Czech Republic. In the 2020 report, India ranked third behind both China and the US. Economies included in the index are ranked based on four key parameters: the nation’s business environment, operating costs, political, economic and environmental risks, and its capability to restart manufacturing. The business environment involves the availability of labour and market access.
However, the consultancy pointed out that despite being in the top three in the baseline and cost scenario rankings, India still has a lot to improve upon, particularly in geopolitical risk management and the ability to restart manufacturing, following the renewed surge of Covid-19 cases.
Increasing FDIs to India
In September, a survey conducted by consulting firm Deloitte Touche Tohmatsu India LLP showed that 44% of 1,200 global business leaders based on those countries plan to invest for the first time or make additional investments in India. Amidst the economic impact of the pandemic, India was able to record $81.72 billion in foreign direct investment (FDI), growing by 10% compared with the previous fiscal year.
Furthermore, the Deloitte report stated that among first-time investors to India, almost two-thirds plan to make their investments in the next two years. While India scored higher in economic growth and skilled workforce, business leaders rated the country lower in institutional stability, which refers to the efficiency of judicial redress and mechanisms and regulatory clarity. The survey also revealed that investors perceived India as a more challenging business environment compared with China and Vietnam prior to becoming aware of existing government programs and reforms. After gaining knowledge about those initiatives, about 75% of them expressed increased willingness to invest in India’s economy.
Seven capital-intensive sectors that India can target to attract more FDI are identified in the report: electronic goods, food processing, textiles and apparel, vehicles and parts, capital goods, pharmaceuticals, and chemicals and active pharmaceutical ingredients.
However, according to JM Financial, the manufacturing sector has been less dependent on
market funds for fixed investments. As per the report, auto, retail and education sectors in India are seeing a revival in FDI flows, indicating investment interest in the country’s consumption themes.
“FDI into manufacturing has remained stagnant at USD 20bn/year over the past 4
years, indicating that initiatives like ‘Make in India’ and gains from structural deindustrialization in China since 2012 have not been substantial beyond select industries like chemicals,” the September report added.
Can India become a global manufacturing hub?
The Indian government has launched financial incentives in 10 identified sectors to boost manufacturing activities, add jobs and help scale up exports. In its goal of boosting the manufacturing landscape, the government launched a scheme for firms producing information technology (IT) hardware in March 2021. This is in addition to the incentive scheme for manufacturing electronic components and semiconductors and the Modified Electronics Manufacturing Clusters Scheme, introduced in April 2020. The initiatives resulted from the impact of the pandemic on the global electronics supply chain and geopolitical turbulence.
More multinational firms are also looking to expand their supply chains beyond China, with India as an alternative or complementary location for their production activities. Additionally, India’s large population, made up of a younger workforce with lower wages and the ability to speak multiple languages, can be taken advantage of to grow its manufacturing sector.
Forrester Research Analyst Himank Joshi told Computer Weekly that the schemes could be promising for India’s electronics manufacturing sector, particularly when firms are trying to lessen the risks of their supply chains. While the targets set by the Indian government are ambitious, they are feasible, Joshie said. He also emphasised the importance of execution and scale of benefits in attracting investments and attaining growth targets.
However, India’s manufacturing industry still faces several challenges. Nityesh Bhatt, professor and chairman at Nirma University’s Institute of Management, calls for an innovation ecosystem in the country. According to him, such an ecosystem should consist of land and labour reforms, access to finance, skill-building initiatives, and continuous infrastructure development as critical to this ecosystem.