Market Insight:

Impact of Manufacturing Excellence

on Make in India

August 2016
 2016

Table of Contents
Executive Summary....................................................................................................................................................... 2

1.0. Indian Economy and Trends ........................................................................................................................... 3

2.0. MAKE IN INDIA ................................................................................................................................................. 5

2.1 Program Structure .................................................................................................................................... 5

2.2 Results so far ............................................................................................................................................ 7

2.3 Comparison to Other Countries ............................................................................................................. 7

3.0. Impact on Manufacturing Sector ..................................................................................................................... 9

3.1 Challenges facing India’s Industry ....................................................................................................... 10

4.0. Conclusion ....................................................................................................................................................... 10

1|Page
 2016

Executive Summary

During the past two decades, the Indian economy has witnessed a transformation to emerge as one of the
fastest growing economies in the world. Economic reforms unveiled in 1991 have brought about a structural
shift enabling the private sector to assume a much larger role. GDP growth has largely been enabled by
growth of the services sector. The worry is that India’s manufacturing sector has stagnated at about 16
percent of GDP, with India’s share in global manufacturing at only 1.8 percent. This is in stark contrast to
the experience of other Asian nations at similar stages of economic development, particularly China where
manufacturing constitutes 34 percent of GDP and 13.7 percent of world manufacturing — up from 2.9
percent in 1991.

During the last few months, the Indian economy has been witnessing positive sentiments. The
macroeconomic indicators have also displayed an encouraging trend in the recent times. Even though the
situation of manufacturing sector in India is a cause for concern, the industrial growth scenario has
improved in 2015 as compared to the previous fiscal. The recent measures undertaken by the new
government in terms of facilitation to industrial sector, creation of conducive environment for the
manufacturing activities, focusing on improving industrial policies and procedures, and reforming labor laws
have facilitated recovery in industrial sector.

Make in India is an ambitious initiative launched by the Government of India in September 2014 with a
mission to transform India into a global design and manufacturing hub. India aims to become the top
destination for FDI in the world. The initiative plans to increase the contribution of manufacturing to India’s
GDP to 25% from current 15% and also generate employment. India aims to increase its competitiveness
compared to China which is seen as a more favorable destination for manufacturing. India believes it has a
lot of untapped potential in terms of human resource and infrastructure development which, when properly
utilized, will propel India into an industrial hub.

The Make in India functions and operatives at different levels. The government has identified 25 priority
sectors that shall be promoted. These industries are identified based on their size and potential growth. The
government aims to increase employment and FDI in these industries. In most economic activities in the
identified sectors, 100% FDI will be allowed. The business process will be made easier from setting up
through production, distribution, and sales. Extended licenses, self-certifications, and reduced compliance
requirements will be provided as incentives to encourage production. This will improve the ease of doing
business in India. The manufacturing infrastructure and capacity will be developed in large scale to facilitate
manufacturers to function efficiently. Five industrial corridors have been identified across the country which
will provide a framework of manufacturing and logistics network. The government will continue to provide
necessary support and concessions required over a period of time until its vision to convert India into a
manufacturing hub and the top FDI destination becomes a reality.

Nevertheless, challenges exist in the form of automation of production process affecting employment,
difficulty in replicating China’s model, and unifying the objectives of various stakeholders. The government
is aware that the initiative and its objectives are not easy tasks, requiring sustained inputs, promotions and
managements, and providing the investors with ample space for market development. This can be achieved
only through coherent strategy, efficient marketing, and proper investment.

2|Page
 2016

1.0. Indian Economy and Trends

India has a diversified economy with no individual sector accounting for more than 25 percent share as
represented in the chart below. Various major sectors such as aviation, retail, agriculture, life sciences, ICT,
infrastructure, manufacturing, and automobile are poised for strong growth.

Figure 1: Sector-wise GDP share in 2014-15 (% of GDP)

3|Page
 2016

 India's GDP is expected reach $3.4

trillion by 2020, but holds the
potential to reach nearly $4 trillion if
investments and manufacturing
growth are more aggressive than
expected. In the aggressive growth
scenario, India could displace the
United Kingdom and become the
5th largest economy by 2025 from
its current position as 10th.
 India will gradually shift from a
services-based economy to an
industry-driven economy by 2025
with increased contribution from
industries and the manufacturing
sector. India’s manufacturing
sector, in terms of gross value added to GDP (at the current growth rate), could reach $1,149 billion
by 2022 and contribute 25% to GDP.
 India is expected to become one of the global leaders (top 5) in at least 10 big markets of the
future. It will be the 5th largest exporter in the globe and the largest manufacturer of chemicals. It
will be also become the largest consumer market for luxury goods and technology services, such as
direct-to-home TV and mobile apps.
 India is forecast to become the 3rd largest automotive market by 2025, with nearly 7 million car
sales during the period. It will become the major manufacturing hub for cars in Asia with the likes of
Hyundai expanding manufacturing in India. Three out of 10 two-wheelers will be an electric vehicle.

4|Page
 2016

2.0. MAKE IN INDIA

Since its launch, the Make in India initiative has started showing results. Increased production outputs and
growing FDI into India are seen as a result of the initiative. Industry leaders have welcomed the initiative
and are bullish about its success. Global investors see the opportunity in India and acknowledge the
improved business environment in India. Over the next 5 years, large scale foreign developments are
expected all over India.

2.1 Program Structure

The plans and implementations of the Make in India initiative can be divided into the following segments –

1. Identification of 25 key industries that has high growth potential and promoting investment in them
through marketing, infrastructure development, reducing compliance requirements and providing
monetary concessions. The 25 industries are:

Automobile
Automobiles Aviation Biotechnology Chemicals
Components

Defence Electrical Electronic Food

Construction
manufacturing Machinery systems Processing

IT and
Business Media and
Leather Mining Oil and Gas
process Entertainment
management

Pharmaceutic Ports and Renewable Roads and

Railways
als Shipping Energy Highways

Space and Textiles and Thermal Tourism and

Wellness
astronomy Garments Power Hospitality

Figure 2: 25 key industries that has high growth potential

5|Page
 2016

2. Development of 5 Industrial corridors in India as highly industrialized and urbanized regions suitable
for establishing manufacturing facilities and which enjoy high economic activity. National Industrial
Corridor Development Authority (NICDA) is being established to converge and integrate the
development of all industrial corridors. The 5 industrial corridors are:

Delhi Mumbai Mumbai Bangalore Chennai Bangalore

Industrial Corridor Economic Corridor Industrial Corridor

Vizag Chennai Amritsar Kolkata

Industrial Corridor Industrial Corridor

Figure 3: Proposed 5 industrial corridors

3. Provision of support to industries through easy access to information, government services, online
portal for communication and networking, integrated government services through e-Biz and
continuous promotions and protection for industries.
4. Offering of various concessions and simplification of regulations are provided to encourage
investing. They include-
 Amending labor laws to provide flexibility in working hours
 Simplifying the process of obtaining industrial license
 Extending validity of industrial license to 3 years from the current 2 years
 24 manufacturing cities identifies and are being developed in phases
 10% capital subsidy provided for manufacturing equipment for pollution control, reducing
energy consumption, and water reservation
 In the identified 25 sectors, expect a few services, 100% FDI is allowed; in other industries,
the allowable FDI limit has been raised
 The government approved the intellectual property rights (IPR) policy which will allow IPR
to be marketed as a financial asset, promote innovation and entrepreneurship, while
protecting public interest
5. Development of infrastructure through developing smart cities and excellent transport connections
all over India.
6. To meet the target of employing 100 million people by 2022, massive training and development will
be conducted to create skilled workers.

6|Page
 2016

2.2 Results so far

Increase in FDI

In the 20 months till the launch of Make in India in October 2014, India
has received a total of $61.58 billion in FDI, which is 46% more than
the $42.31 billion that India received as FDI in the previous 20 months.

Manufacturing plants proposed and Set-up

The government has received lot of proposal worth billions of dollars

from domestic and foreign companies to set up manufacturing firms in
India. The top industries are electronics and automobile. The
electronics industry received Rs.1.20 lakh crore worth of proposals
between September 2014 and November 2015.

Jobs created

In the year 2015, 1.35 lakh new jobs were created in top 8 labor
intensive sectors. Make in India has not provided the expected result in
job creation.

2.3 Comparison to Other Countries

China

The government of China had announced Made in China 2025 plan in 2015 to push the country beyond
labor intensive work into more sophisticated sectors, from robotics to aerospace. In the scale of the
program and the economy and in technology, China is far ahead of India. India’s advantage lies in its faster
economic growth rate than China. India at present has the opportunity to make use of the increasing
purchasing power and industry growth potential that China had a few decades ago.

Japan

Similar to China, Japan is also a high tech manufacturing country, coupled with good government-industry
cooperation and a strong work ethic. Japan exploded as a manufacturing hub after World War II and has
now placed itself as a top destination for mastery in high technology. India has a long way to go before it
reaches a high tech country, but can be compared to Japan during its development phase. With a $2 trillion
dollar economy and favorable government policies, India is currently at the right moment to invest in its
infrastructure and human resource to further develop its manufacturing sector.

Germany

Germany is the biggest economy in Europe. Similar to Japan, Germany after the devastating defeat in
World War II, had rebuilt its manufacturing sector. Moreover a big recipient of FDI in its early post World
7|Page
 2016

War II era, Germany developed its manufacturing especially in automobiles, engineering, and electronics.
India has good economic and diplomatic relation with Germany. Emulating Germany’s success may be
difficult for India as Germany had unique advantage of being placed in the heart of Europe and a strong
commitment from the United States to develop Germany. Even if India cannot become the manufacturer of
the world, it can still be the biggest producer in its surrounding regions. India could take a cue from
Germany’s commitment to develop its manpower which is of urgent necessity to India.

Brazil

Brazil, which is the biggest economy in South America, is part of BRICS countries which are the most
promising economies for the coming decades. India, also a member of BRICS, has lot of similarities with
Brazil. Yet Brazil has higher contribution of 28.5% from manufacturing toward its GDP than India which is
around 15% only. Brazil's industries range from automobiles, steel and petrochemicals to computers,
aircraft, and consumer durables. In 1994, Brazil introduced the Plano Real measure to stabilize the
economy. It provided the necessary stability and Brazilian and multinational businesses invested heavily in
new equipment and technology. India has a stable economy and it is up to the policy makers to exploit the
opportunity for the benefit of India’s manufacturing sector.

Mexico

Mexico’s economy has performed well relative to other major Latin American economies in recent years,
largely because of its thriving manufacturing sector. Unlike Brazil and Argentina, whose manufacturing
sectors are slumping, Mexico has continued to see solid growth because of its integration with and
dependence on the U.S. market, according to Forbes. Its younger demographics and geographical
proximity to the United States make it more favorable than China for U.S. companies to source and
manufacture goods. Although low global oil prices will put pressure on Mexico’s economy, the performance
of the manufacturing sector — especially in low cost manufacturing — has been a key driver of Mexico’s
economic growth. The cost of productivity adjusted labor costs has been a significant factor contributing to
the success story of low cost manufacturing in Mexico.

8|Page
 2016

3.0. Impact on Manufacturing Sector

Make in India has already resulted in positive impact on the manufacturing industry. Some of them are-

Deregulation of the Manufacturing Sector

The process of applying for industrial licenses is to be made through an online portal. For activities
classified as non-risk or non-hazardous, safety standard requirements are either self-certification or third-
party certification. The government is keen to improve the India’s notorious sluggish bureaucracy. Such
deregulation of the manufacturing sector will greatly improve the image of India on the global stage and
encourage investments. This is an important move to achieve transparency, efficiency, and economical
prudence. Through these initiatives, India is also trying to improve its ranking in the World Bank Ease of
Doing Business index in which it currently holds a dismal rank of 130 out of 189 countries.

Opening of High Value Industries

India has opened up or increased the private investments and FDI into defense, railways, and aviation. The
automatic route of FDI, which allows foreign companies to invest in India without a prior approval from
either by the Government or the Reserve Bank of India, has been extended to most activities in the
identified 25 sectors. This allows the foreign companies to enter the Indian market with their latest
technology and the domestic investors to employ their capital in industries of high value.

Improved Infrastructure and Man power Resources

The government has planned to invest heavily in developing infrastructure. The Delhi Mumbai Industrial
Corridor will be developed at a cost of $90 billion, which is the biggest infrastructure development in the
country ever. By 2019, the government plans to complete 7 smart cities. The government has also launched
Skill India Campaign which works toward skill development among Indian youths and also encourages
entrepreneurship. The manufacturing sector must seize this opportunity and efficiently employ its resources
for the benefit of the sector.

Increase outputs

Make in India also aims for efficiency in operations. Recently, the GST bill has been cleared by the
parliament. It will further reduces logistics cost, decreases tax filing formalities, and improves efficiency. The
government encourages production not only for domestic consumption but also for export. Make in India
initiative includes setting up a mechanism for availing concessions for selling goods produced in India to
foreign markets. Such features encourage increased production.

Rise in International Engagements

Due to the government’s initiatives, several international private and public investment commitments have
been made and agreements signed. Japan has committed to $35 billion of investment and financing to India
and China has committed to investing $20 billion over the next five years. India and Australia signed a

9|Page
 2016

bilateral Civil Nuclear Cooperation Agreement, enabling the sale of Australian uranium to support India's
growing energy needs. The government’s Look East policy aims to link the west with India in various
economic activities. Many more commitments are expected from the global economies towards India in the
coming years.

3.1 Challenges facing India’s Industry

1) India’s ambitious Make in India plan will require huge effort from the government to develop the
required infrastructure and skill. India will find it difficult to get the finance as it cannot rely on FDI for
the whole development.
2) Make in India may not meet its 100 million job creation target as robots will take up most of the jobs
in the manufacturing sector.
3) Any changes in labor laws and setting up or closing down of a facility will have to face disruptions
from unions and political parties. Creating consensus between these factions will be difficult.
4) Training the required work force will require time. These will slowdown progress.
5) India severely lags in research and development compared to other big economies. This
phenomenon is largely prevalent in domestic companies, which will affect India’s competitiveness.
6) India faces direct competition from China in both regional and global level. China which is a
dominant force in the manufacturing sector will pose challenge to India’s initiative.
7) India faces problems in the form of illicit trade. In 2013-2014, illicit trade resulted in an estimated
loss of Rs.1.05 lakh crore in India’s manufacturing industry.
8) India’s corporate tax rate of 30% is not attractive enough for foreign companies. India should
reduce the tax rate which will increase economic activity or find other ways to attract investment.

4.0. Conclusion

While challenges exist, the overall future of India’s manufacturing industry looks promising. In order to
achieve the goals of the ‘Make in India’ campaign, India should focus on making full use of its opportunities
and also concentrate on mitigating the impacts of challenges faced. The success of the plan means higher
GDP for India, increased purchasing power for citizens, 100 smart cities, increased contribution from
manufacturing sector, high skilled labor force and acquiring the position of a business friendly country. The
sustained commitment from the government toward these objectives will determine the success of the Make
in India initiative.

__End of Note__

10 | P a g e