Factors Driving Growth in The Indian Manufacturing Sector

The Indian manufacturing sector provides livelihood to more than 14 million people (43.4% of the workforce) and contributes ~16% to India’s GDP. The Indian government has prioritised growing the manufacturing sector over the last ten years with several policy initiatives introduced under the "Make in India" campaign. Besides, major economies across the globe are diversifying their supply chains away from China. This is the result of global supply chain disruption that the world experienced as an after-effect of the COVID-19 pandemic and due to over-reliance on China in the manufacturing space. This has opened new ways for the Indian manufacturing industry to prosper. The Indian government, aware of the situation, plans to boost the manufacturing sector’s contribution to the economic output by up to 25% by 2025. In this case study we discuss the key factors and government policies that is likely driving the growth of manufacturing in India.

Manufacturing sector: An overview

With an estimated GDP of US$ 3.7 trillion in 2023, the Indian economy ranks fifth in the world. Despite the COVID-19 pandemic, The Indian economy’s CAGR over the last decade stands at a healthy ~6%. In the years to follow, the Indian economy is predicted to expand at a rate of more than 6% annually, with the manufacturing sector is expected to serve as the primary driver of this growth.

Evolution of the sector

• Pre-Liberalisation: Until the 1990s, the government had significant bureaucratic control over production, trade, and investments in manufacturing. The Indian economy was highly regulated, where industries were required to obtain licenses from the government for the setup and expansion of manufacturing units. This led to Red-tapism, making the entire process tedious and inefficient. For FDIs, inflow was limited to 40% in certain large and heavy industries, resulting in a lack of incentive for investors.
• Post-Liberalisation: In 1991, India took a major step towards integrating with the world economy by adopting economic liberalisation and reform programmes in 1991. Restrictions on investment projects and business expansion were gradually removed and FDI limits were steadily increased to almost 100%, except for certain industries. While manufacturing continued to be an important part of the economy, these policies largely emphasised the growth of the services sector due to changing market dynamics, globalisation, and technological advancements.
• Make in India: September 2014 marked the commencement of the ‘Make in India’ program by the Indian government, emphasising that ‘making the production process the main driver of the economy’ will be the objective of the initiative. While the emergence of industrial corridors like the Delhi-Mumbai Industrial Corridor (DMIC) and Chennai-Bengaluru Industrial Corridor (CBIC) were one of the factors behind the growth of manufacturing in India, this provided an environment in which manufacturing activities flourished, attracted investments, and fostered economic growth. The matter of consideration was simplifying foreign direct investments and urge it to increase. This will also aid in the reduction of imported goods, help to strengthen indigenous industries, and to govern the economy under centralised management. These measures improved India’s ‘Ease of Doing Business’ ranking by the World Bank with India reaching 63rd place in 2020 from 142nd position in 2015.

How India’s manufacturing sector fare among the top five global economies

An analysis of the top 5 economies in the world reveals that only the US has a lower contribution (~11%) from the manufacturing sector to GDP compared to India. In India, the manufacturing sector has historically contributed 15-17% of its GDP, while in China, the sector’s average contribution stood at ~ 29% from 2011 to 2022. For Japan and Germany, the manufacturing sector contributed ~20% of GDP during the same period. This relative comparison indicates that there is still significant potential in India’s manufacturing sector to increase its contribution to the nation’s GDP and drive economic growth and employment creation over the next decade.

Moreover, the recent COVID-19 pandemic and many conflicts worldwide have proven the point that a country’s complete dependence on another country for the manufacturing process might include various risks. That is the main reason why leading suppliers are going for the China + 1 approach by openly looking for alternatives to China. Product makers around the globe now consider India as a preferred destination owing to the added advantages of policy support and the availability of human capital, particularly skilled workers. The Indian government is heavily committed to utilizing these trends for its own gain, so it is planned that the manufacturing sector’s contribution to the Indian economy output will be increased up to ~25% by 2025.

Summing up

The government’s thrust to encourage manufacturing and a unique demographic advantage are driving the manufacturing sector towards more automated and process-driven manufacturing, which will result in improved efficiency and boost the production of the industry. With a focus on developing industrial corridors and smart cities, the government is looking to develop a favourable environment for the industrial development, which will promote advanced practices in manufacturing. The government has also recognised the importance of Industry 4.0 and launched initiatives like the Smart Advanced Manufacturing and Rapid Transformation Hubs (SAMARTH) Udyog Bharat 4.0 to encourage the integration of technological solutions into the Indian manufacturing Industry.

Today, India is fast becoming a desirable destination for foreign investments in the manufacturing sector. Several luxury, auto, and cell phone brands have established production facilities in the entire country. Many other brands are attempting to replicate this. According to the Indian Cellular and Electronics Association (ICEA), India could increase its total capacity for producing laptops and tablets to US$ 100 billion by 2025, with the help of policy intervention. The PLI schemes are ready to unlock manufacturing capacity, boost exports, reduce import dependence, and lead to job creation for both skilled and unskilled labour. Moreover, the improvement in business sentiment suggests growing optimism among Indian manufacturing firms regarding future prospects.

In a nutshell, we can conclude that the stars are aligned for the manufacturing sector to achieve greater heights, and the Indian government’s vision of increasing the manufacturing sector’s contribution to the Indian economy by 25% looks achievable.