Companies are increasingly shifting their focus from China to other Asian markets for sourcing and manufacturing of products. India gets some of the most attention and will play an important role in acting as a complement to Chinese manufacturing in the future.
In this article, we take a deeper look into the Indian manufacturing landscape, covering topics such as the advantages of choosing India, the disadvantages, what products that can be manufactured, and more.
- Population: Around 1.4 billion
- Capital: New Delhi
- Bordering countries: Afghanistan, Bangladesh, Bhutan, China, Maldives, Myanmar, Nepal, Pakistan, Sri Lanka
- Major cities: New Delhi, Mumbai, Bangalore, Kolkata, Chennai, Hyderabad, Ahmedabad
Advantages of Manufacturing in India
India has many advantages for sourcing, particularly as companies increasingly adopt China plus-one strategies to diversify manufacturing. This is something that Southeast Asia will benefit from greatly as well. Let’s review some of the greatest advantages of choosing India as a sourcing market.
Young and English-speaking workforce
Approximately 65% of the population in India is below the age of 35. At the same time, the share of the young working population in the total population is increasing.
This abundant young workforce can boost Indian manufacturing over the next two to three decades, fostering India to achieve its full manufacturing potential.
Furthermore, India has long been claimed as the world’s second-largest English-speaking country, making communication easier compared to countries like China and Vietnam.
Low labor costs
India has significantly lower labor costs compared to China. This enables businesses to gain access to a large pool of talent at highly competitive costs.
India also has a cost advantage for manufacturing wages, particularly for trained blue-collar workers, according to ARC Consulting’s research and database from 2021-2022. As shown in the chart below, India has an edge over the Southeast Asian countries of Malaysia, Thailand, Indonesia, and Vietnam.
One of the biggest advantages of choosing India is its design and manufacturing capabilities, which makes it more appealing for companies looking for an end-to-end manufacturing solution. Rather than countries who only focuses on midstream manufacturing activities.
A wide range of products can be produced in a multitude of industries, with some of the more notable industries being:
Chemicals: including bulk chemicals, specialty chemicals, petrochemicals, agrochemicals, polymers, and fertilizers
Pharmaceuticals: such as OTC medicines, Generics, APIs, Vaccines, and Biosimilars
Automotive: including spare parts and components
Electronics: including mobile phones, IT hardware such as laptops and tablets, consumer electronics TV and audio, industrial electronics, and automotive electronics
Industrial machinery: including equipment for heating, ventilation, air conditioning, and machine tools
Textiles: from the production of raw materials to the delivery of finished products
Another notable advantage of manufacturing in India is the abundance of high-quality equipment.
Improved economic environment
The Indian government’s policies have been increasingly supportive of businesses that want to source in India, presenting them with a greater sourcing opportunity.
In 2021 and 2022, we saw significantly more support from Indian authorities aiming at the country’s manufacturing sector, especially in key manufacturing industries such as automotive, chemicals, and electronic components.
For example, through the Production-Linked Incentive (PLI) scheme, the Indian government intends to build global manufacturing champions across 13 industries and has earmarked US$ 27.13 billion for five years starting from 2022. Regarding the semiconductor manufacturing industry, the PLI is set at $9.71 billion, with the goal of putting India as a prominent manufacturer of this critical component.
Besides that, the Indian government authorized a PLI scheme worth US$ 2.47 billion in May 2021 for the development of advanced chemical cell (ACC) batteries, which is anticipated to attract US$ 6.18 billion in investments, increase capacity in core component technologies, and position India as a global clean energy powerhouse. In September 2021, the government approved a PLI scheme worth US$ 3.53 billion for the automotive & drone industry.
Some notable government initiatives encouraging the manufacturing and industrial sectors are listed in the table below:
Increased domestic demand
India has a growing middle class, which makes it a desirable consumer market. The Indian middle class is expected to account for 17% of global spending by 2030, ranking second globally, which speaks for itself.
The Indian market for appliances and consumer electronics (ACE) is predicted to increase to US$ 21.18 billion by 2025, up from US$ 10.93 billion in 2019.
According to a report published by NITI Aayog and RMI India, India’s electric vehicle financing sector is expected to reach US$ 50 billion by 2030.
Disadvantages of Manufacturing in India
Despite India’s manufacturing-related advantages, the country faces many challenges, particularly as it seeks to become a global manufacturing hub and capitalize on China-plus-one strategies.
Despite improvements, India’s ill-adapted infrastructure, including roads, railroads, airports, seaports, electricity grids, and telecommunications, poses obstacles to the country’s expanding economic status and ability to perform public services.
Telecom communication facilities are primarily concentrated in major cities. Most of the State Electricity Boards are losing money and are in disrepair.
Despite being surrounded by water and having manufacturing centers both close to the coast and in the hinterlands, India’s manufacturing is impeded by weak marine infrastructure. Few Indian cities have established facilities for swift entry and exit, while trucks continue to queue at the border of Mumbai, India’s largest port. Even in Kolkata, India’s largest metropolis and one of the world’s largest cities, traffic limitations on a small stretch of road exert a negative impact on port operations.
The transportation challenges do not end with the ports. Because most overbridges and flyovers are designed to accommodate passengers, the practicality of double-stacked containers and cargo transit along rivers should also be called into question.
Many causes, such as significant population expansion, expanding urbanization, and rising wages put pressure on the government to invest in the country’s infrastructure. As a result, the government is allocating significant funds to infrastructure initiatives. This paints a hopeful picture of a new India with better-equipped infrastructure.
Complex regulations & laws
The manufacturing sector in India is subject to a plethora of complex laws, related to licensing, tenders, and audits, which can be burdensome for enterprises and stifle their growth.
Cumbersome manufacturing-related legislations in India are the labor laws. The laws are extremely intricate since they vary depending on the number of workers.
For instance, the Industrial Disputes Act (ID Act), which specifically states that an employer is generally required to retrench the worker who was the last individual to be employed in a specific category when dismissing workers. Furthermore, additional requirements apply to factories such as a factory with a headcount of more than 100 must obtain prior permission from the appropriate authorities before laying off workers. Besides, and these workers must be granted a three months’ notice (or pay in lieu of notice) as well as Retrenchment Compensation.
As a result, investors are generally hesitant to invest in this area. Consequently, many Indian firms remain relatively small.
Labor is on the concurrent list, and the subject is governed by more than 40 central laws and more than 100 state laws. Fortunately, the central government is eager to unify the central law codes governing wages, industrial relations, social security and welfare, and occupational safety, health, and working conditions. This probably results in reforms to ensure the ease of doing business.
Reliance on imports
India is still dependent on imports for transport equipment, machinery (electrical and non-electrical), iron and steel, paper, chemicals and fertilizers, and plastic materials.
As an example, consider the pharmaceutical business, which is one of the most vital and lucrative industries in India. Being a major producer of pharmaceutical products, India relies significantly on China for active pharmaceutical ingredients (APIs), the material that creates the desired effect of the medicine. It is also overly reliant on China for key starting materials (KSMs), which are the raw components used to manufacture APIs.
Energy requirements are another example of India’s heavy reliance on imports. Currently, around 86% of India’s crude oil requirements must be imported, with nearly a quarter of this supply coming from Russia.
What products can be manufactured in India?
India has several industries that generate a wide range of products. The three industries listed below are commonly regarded as India’s top three manufacturing ones.
Electronic device demand is predicted to grow steadily and remain a significant economic driver internationally. The Indian electronics industry is one of the world’s fastest-growing ones, making the country appealing as a sourcing site for electronics items. India pioneered the Local Goes Global movement.
In the electronics export industry, India is focusing on increasing its global value chain share, establishing export hubs in many states, constructing a high-quality and seamless supply chain, and raising its overall market share.
The Government of India aspires to make India a prominent manufacturing and design base for electronics as part of its Aatmanirbhar Bharat plan. India’s market share in the global electronics manufacturing industry increased from 1.3% in 2012 to 3.6% in 2020. The Indian electronics industry is on an upward trajectory, and the government has set short- and long-term goals to make India a center for electronics exports and manufacturing.
Smartphone manufacturing is an outstanding category of Indian electronics manufacturing because India is one of the world’s largest mobile handset manufacturing countries and the world’s second-largest smartphone market.
Furthermore, consumer electronics should be highlighted because of the many major factors for the market’s rise, which include greater access, increased awareness, changing lifestyles, lower unit pricing, and increased disposable income.
India’s chemicals industry is extraordinarily diverse, with over 80,000 commercial products that can broadly be classified as bulk chemicals, specialty chemicals, agrochemicals, petrochemicals, polymers, and fertilizers.
The Indian chemicals industry was valued at US$ 178 billion in 2019 and is expected to be valued at US$ 304 billion by 2025, with an annual growth of 9.3%. Chemical consumption is predicted to grow at a 9% annual rate by 2025. The chemical industry is considered a major economic driver, with the chemicals sector being expected to contribute 300 billion to the country’s GDP by 2025, accounting for 25% of the industrial sector’s GDP.
On a global basis, India has a strong position in chemical exports, ranking 14th in exports (excluding pharmaceuticals). Organic and inorganic chemical exports increased 38.67% year-on-year to US$ 24,313.88 million between April 2021 and March 2022.
During the Covid-19 outbreak, the Indian chemicals sector benefited from a slew of opportunities resulting from supply chain disruptions in China, the trade disputes between China and the US, and anti-pollution policies in China. In addition, India’s proximity to the Middle East, the world’s largest supplier of petrochemical feedstock, allows it to capitalize on economies of scale.
Several measures have been taken by the Indian government to prevent the dumping of inferior and cheaper chemicals, including the implementation of a BIS-Certification system for imported chemicals. Several fiscal incentives, such as tax rebates and special incentives, are available to encourage the development of downstream units in Petroleum, Chemicals, and Petrochemicals Investment Regions (PCPIRs) or Special Economic Zones (SEZs).
As a result of these incentives, the industry is expected to be able to increase production and develop in an efficient manner. The PCPIRs policy is expected to attract $276.46 billion in investment in dedicated integrated manufacturing clusters by 2035.
Like the leather industry, the textile industry in India is one of the country’s oldest, stretching back several centuries. The textile business is immensely diverse, with hand-spun and hand-woven textiles at one end of the spectrum and capital-intensive modern mills at the other.
The strong manufacturing base of a diverse range of fiber/yarns such as cotton, jute, silk, and wool, as well as synthetic/man-made fibers such as polyester, viscose, nylon, and acrylic, is the major foundation of India’s textile sector. Another important element of the Indian textile industry is the dominance of the decentralized power looms/hosiery and knitting sector. The textile industry stands out from the rest of the country due to its tight ties to agriculture (for raw materials such as cotton) and the country’s ancient textile culture and customs.
India is the world’s largest cotton producer, with cotton production expected to reach 7.2 million tons by 2030 due to rising consumer demand.
From 2019 to 2025-26, the Indian textile and clothing sector is expected to grow at an annual rate of 10%, reaching US$ 190 billion. In terms of the textile and clothing trade, India represents 4% of the global market.
Can India replace China as a manufacturing hub?
In the short-to-medium term, India cannot dethrone China as the world’s manufacturing power due to some of the shortcomings mentioned.
First, India’s workforce and infrastructural availability lag well below China’s. Not to add that many Indians who grow up in the slums spend their entire lives without having their names registered in official records. As a result, India’s labor-skills deficit with China is likely to be worse than official figures indicate.
Manufacturing necessitates capital, particularly infrastructure, in addition to labor. Few developing countries, including India, can compete with China in this respect. Despite increased infrastructural investment in recent years, India is still not at the same level as China.
Although India has little to no chance of replacing China as the world’s factory, it’s expected to become a sourcing destination that complements China, particularly due to companies’ shift in implementing China-plus-one strategies.
With that said and looking into the future, India has the potential to become a global manufacturing hub, contributing more than $500 billion to the global economy yearly by 2030.
When it comes to choosing a sourcing location, India will surely be a top-of-mind option not only in Asia but worldwide. This is especially visible in the light of companies’ China-plus-one strategies, and where many corporations have been migrating out of China in search of new sourcing destinations.
Looking at optimal sourcing locations, India has numerous characteristics that set it apart. Aside from having a young, competent workforce in large numbers and at a low cost, India also has other manufacturing advantages such as all-around manufacturing competence, a favorable economic environment aided by government efforts, and a giant domestic market.
Bright as it may seem, Indian manufacturing still has many disadvantages. Poor infrastructure conditions, complex legal systems, and a significant reliance on imports are the most visible drawbacks that multinational firms should be mindful of when producing in India.
Although replacing China as the world’s manufacturing powerhouse appears to be an impossible task in the short-to-medium term, India is unquestionably the brightest star in the sky among additional sourcing destinations to include in the China-plus-one plan.