Should manufacturers be the only centre of focus?

India today is attracting a lot many foreign investments and for the obvious reasons. These foreign investors are investing profusely in the manufacturing sector. However, with India very well poised to become a manufacturing hub of sorts itself, it is but natural for these offshore companies to remove their focus and channelize their investments in sectors and domains, other than manufacturing. Many investors occupy a stake or equity in indigenous companies and often manage to garner Indian citizenship in due course of time. The impending question is – will such a modus operandi work for India, given the fact that India is all set to become the next economic superpower, pivoted around its manufacturing segment and many other sectors.

India today is on a threshold of major policy reforms and is well positioned to become the world’s third-largest economy by 2030. The Prime Minister had said that India offers the 3 'Ds' for business to thrive— democracy, demography and demand. Additionally, the country also boasts of a young, tech-savvy and educated population, skilled labour, strong legal and IPR regime, and a commitment to calibrated liberalization. The indigenous manufacturing sector has evolved through several phases from the initial industrialization and the license raj to liberalization and the current state of global competitiveness. Today many Indian manufacturing companies are formidable global players. 

Initiatives such as “’Make In India”, “Digital India”, “Skill India” etc introduced by the Modi-led Government will evidently bring about a major positive change in the country’s economic track. The Make in India initiative was particularly launched to make India a global manufacturing hub and create more jobs in the process. The opening up of Railways and Defence to FDI will also boost the Indian manufacturing sector. Make in India program encourages multi-national, as well as domestic companies to manufacture their products in India with major focus on sectors including automobiles, chemicals, IT, pharmaceuticals, textiles, ports, aviation, leather, tourism and hospitality, wellness, railways, auto components, design manufacturing, renewable energy, mining, biotech and electronics.

The success of the initiative can be gauged by taking into account a few numbers. India received several proposals from companies interested in manufacturing electronics in India. Some of these companies are Samsung, Micromax, AirBus, Hitachi, Huawei, Spice among many others and they had already invested in crores to this end. On the other hand, electronics segment such as televisions, which had long been dominated by Korean and Japanese makers are now witnessing stiff competition from home grown brands. The growth of domestic television makers bears resemblance to the growth of Indian companies in the mobile phone segment – 30-40% low prices compared to foreign behemoths, even if equipped with smart features, internet connectivity and high-definition video quality, and footprint in tier II and tier III cities. These companies targeted the value conscious discerning Indians, individuals who aspired to have a big screen television planked on the wall, but could not afford a high priced international brand.

Furthermore, several factors and progressive policies such as ease of doing business, removal of ancient laws, 100 Smart Cities, disinvestment of public sector undertakings, skills and job creation and others are turning India into a global manufacturing hub.

True there exists few challenges with regards to infrastructural development, electricity and economic bottlenecks but the Government is aggressively doing away with those red flag areas. India is bullish on increasing manufacturing’s share in GDP from current 17.4% to 25% by 2025. Even at 6% annual GDP growth rate, by 2025, India would need to expand its manufacturing value add (MVA) to US$ 837.7 billion and manufacturing gross output (MGO) to US$ 3.8 trillion to meet this target. This will easily bring the country in league with the major manufacturing nations the world over.

Until now India was largely seen as the destination for services industry and this is fast altering. With such a paradigm shift in the offing, it is only natural for foreign investors to shift their focus from the manufacturing industry and direct the capital elsewhere such as the services sector or allied infrastructural areas like for example, logistics, transport, power generation etc.

Some of the other initiatives that are launched by the Government, targeted at the manufacturing industry are as follows:

•             Sector specific subsidies to promote manufacturing. For electronics manufacturing, the Govt. provides capital subsidy of up to 25% for 10 years. Additionally there are area based incentives for units in SEZ/NIMZ etc

•             Higher weighted deductions of 200% provided for expenditure related to R&D

•             Export incentives such as duty drawback, duty remission schemes etc.

•             Each state of India offers additional incentives for industrial projects and some states have separate policies for textile sector as well. Some of these are rebated land cost; relaxation in stamp duty exemption on sale/lease of land; power tariff incentives; concessional rate of interest on loans; investment subsidies / tax incentives; backward areas subsidies; special incentive packages for mega projects.

Today, the Indian economy boasts a robust annual growth rate, flourishing capital markets, and increasing foreign exchange reserves.

Thus, with Make In India in the backdrop and several similar policy reforms on the anvil, the manufacturing industry is all set to grow further and should be a key focus area for the Government. Foreign companies and investors should look to channel their capital to sectors and services that are auxiliary to manufacturing, infrastructure, transport, logistics, power etc.

—by Mr Arjuun Bajaj, Founder, Daiwa