Understanding India’s Manufacturing Landscape

India is strategically positioning itself to become a global manufacturing hub to meet domestic growth objectives, achieve export targets, and fulfill geopolitical aspirations.

India’s ascent as a premier manufacturing hub for global firms is fueled by several key factors. Its expansive developing economy, coupled with strategic logistics and maritime capabilities, alongside a substantial consumer base, form the bedrock of its appeal. Investments in both physical and digital infrastructure, complemented by landmark tax reforms, have nurtured a conducive business environment. The government’s pro-business policies further amplify India’s attractiveness.

Moreover, abundant natural resources and a youthful workforce provide fertile ground for sustainable growth and innovation. Emphasizing high rates of technology adoption and a commitment to sustainability, India’s readiness for modern manufacturing solidifies its status as a sought-after destination for global firms looking to expand operations.

Overview of India’s manufacturing sector

India is projected to be the fastest-growing major economy over the next three years, particularly as credit rating agencies observe a slowdown in China. India hopes to become the third-largest economy in the world with a GDP of US$5 trillion in the next three years and touch US$7 trillion by 2030 on the back of continued reforms. Ten years ago, India was the 10th largest economy in the world, with a GDP of US$1.9 trillion at current market prices. Today, it is the 5th largest, with a GDP of US$3.7 trillion (estimate FY24).

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The Indian economy is now entering a pivotal phase on the S-curve, characterized by rapid urbanization, industrialization, rising household incomes, and increased energy consumption. This phase, spanning several decades, typically witnesses accelerated growth in these domains.

India’s manufacturing sector currently accounts for around 17 percent of the country’s GDP. The sector is experiencing a surge in investments, positioning the country as a strong emerging player in global supply
chains. The mobile phone industry is a standout example and could provide a template for how industrial policies can attract foreign investments and lead to optimal production outcomes.

In fact, policymakers in India want it to become the new-age factory of the world and aim to raise manufacturing to 25 percent of the GDP by 2025. There is a sense of urgency as well—with such a large workforce and a median age of around 28, India needs to create jobs at a faster pace, which cannot be met by the services sector alone.

Manufacturing sector performance

In the first quarter of FY 2024 (April–June 2023), the manufacturing gross value added (GVA) reached an estimated US$110.48 billion. By January 2024, India’s manufacturing activity measured on the PMI Index recorded 56.5, the highest in four months, driven by increased export orders. Projections for real GDP growth for FY 2023–24 stand at 7.3 percent, with manufacturing GVA growth forecast to accelerate to 6.5 percent from a modest 1.3 percent the previous year. Additionally, mining GVA is expected to rise by 8.1 percent, up
from 4.6 percent in 2022–23, while construction GVA growth is anticipated to remain robust at 10.7 percent, building upon the 10 percent increase observed in 2022–23.

Regional spread of manufacturing capacity

Projections from Colliers indicate that by 2025-26, the manufacturing market in India could reach an impressive US$1 trillion milestone, with Gujarat emerging as a key manufacturing hub, closely followed by Maharashtra and Tamil Nadu. These regions boast conducive environments for industrial investments, driven by factors such as labor availability, robust infrastructure, and government support. 

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Notable investments from giants like Toyota, Coca Cola, and Micron Technology underscore Gujarat’s emerging appeal as a manufacturing destination. Maharashtra, with its high FDI inflow and well established and conducive business environment, closely trails Gujarat, while Tamil Nadu’s skilled workforce, strong traditional industries, and vibrant ODM/OEM ecosystem contribute to its strong position in the Indian manufacturing landscape. The automotive, electronics, and textiles sectors are leading India’s manufacturing growth trajectory, attracting significant foreign investments and witnessing increased merger and acquisitions
activities. These three states stand out in terms of their performance in these sectors alongside other heavyweights like Karnataka, Haryana, and Telangana.

Furthermore, emerging sectors such as semiconductors, agri-tech, and waste management demonstrate promising potential, fueled by advancements in technology and sustainable practices.

Government initiatives and policies affecting manufacturing

A policy and spending focus on enhancing infrastructure and logistics connectivity, coupled with efforts to streamline bureaucracy, has led to several global multinational corporations (MNCs) redirecting their investments to India. The country is also increasingly being chosen as a key production and assembly base in Asia due to geopolitical factors.

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“Make in India”, “Atmanirbhar Bharat” (Self-Reliant India), the Production-Linked Incentive (PLI) schemes, the FAME Scheme, the Bharatmala Pariyojana Project to boost highway connectivity among the country’s major districts, the proposed DESH Bill to reform the special economic zones model, and the National Logistics Policy are among a handful of government initiatives that are playing a pivotal role in bolstering domestic manufacturing and attracting foreign investment.

Alongside an emphasis on sector-based manufacturing and policies geared towards the creation of local supply chains, the government has prioritized major infrastructure spending. Improving connectivity between industrial hubs, transport corridors and ports, and markets will accelerate the pace of manufacturing expansion in the country within the coming 10 years. By 2047, India wishes to become a developed country. Scaling up the country’s manufacturing capacity alongside modernization and research and development will
serve as necessary growth drivers. 

Further, India’s ease of doing business reforms have centered around streamlining and digitizing regulatory compliance processes throughout the entire business lifecycle, spanning from incorporation to the cessation of operations. For example, in the Union Budget for 2023-24, the government declared a reduction in over 39,000 compliances and the decriminalization of more than 3,400 legal provisions. 

India’s improving logistics

In terms of logistics, India has moved up six places to reach the 38th rank out of 139 countries on the Logistics Performance Index. The LPI index measures countries on six aspects of logistics performance, including infrastructure quality, customs efficiency, logistics services quality, international shipment arrangements, on-time delivery frequency, and shipment tracking. Logistics is integral to the growth of the manufacturing sector and any improvements in the country’s logistics ecosystem has business positive outcomes—ranging from operational efficiency to expanding supplier networks to boosting last-mile-reach to meet demand. 

Consequently, India seeks to reduce its logistics costs from 16 percent of the GDP to a global average of 8 percent by 2030. Per some estimates, the worth of the Indian logistics market will be around US$215 billion in the next two years.

The Production Linked Incentive Schemes

The Production-Linked Incentive (PLI) Schemes are a strategic initiative by the Government of India, aimed at fostering domestic manufacturing as a catalyst for India’s economic growth and employment generation. The PLI schemes involve significant financial allocations, with a total outlay of INR 1.97 trillion (over US$23 billion) for 14 key sectors.

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All sectors approved under the PLI Schemes adhere to a broad framework centered around new and emerging technologies. Capacity development in these areas offer India the opportunity to leapfrog and achieve substantial economic gains while also harnessing their export potential.

The core objectives of the PLI schemes are to improve efficiency, foster economies of scale within the manufacturing sector, and position Indian manufacturers as globally competitive, thereby facilitating their integration into global value chains.

Under the PLI Schemes, financial incentives of 4-6 percent are disbursed over a specified period on incremental sales of products manufactured domestically. Incentives are not guaranteed and are released based on annual performance and meeting stipulated criteria in the respective scheme guidelines. Eligible enterprises must hit their yearly targets to receive the incentive payout for the scheme’s operational period, which ranges from 4-6 years after the base year. The PLI schemes thus allow a gestation period for applicants to begin commercial production.

Official data released on January 17, 2024, showed that the PLI schemes saw over INR 1.03 trillion (approx. US$12.40 billion) worth of investment till November 2023. This investment in turn resulted in production/sales worth INR 8.61 trillion (approx. US$103.72 billion) (US$1=INR 83.01). Besides, more than 678,000 jobs (both direct and indirect) have been created in the process.

Key industries and sectors driving manufacturing growth

Compared to China’s mature manufacturing capacities, India has only recently set ‘the ball rolling’. Vendors of large American, European, and Asian companies are gradually building up their presence in India, with automotive, electronics, and footwear manufacturing being just few examples.

India’s automotive sector is a cornerstone of the nation’s manufacturing prowess and has garnered significant attention from global giants like Toyota, Kia, Tesla, and Ford, signaling their intentions to either establish, expand, or re-enter manufacturing operations within the country.

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Likewise, the electronics manufacturing industry has experienced a surge in investments, particularly in the smartphone production segment. Notably, major players such as Apple’s contract manufacturers have set up assembly units in India, signaling a shift towards localized production strategies.

Furthermore, the textiles and garment manufacturing sectors have witnessed increased investment activities, with several global brands reassessing their sourcing strategies and investing in Indian textile units to leverage the country’s competitive advantages in this domain. 

In line with fostering industrial growth, the Government of India’s Ministry of Heavy Industries and Public Enterprises introduced SAMARTH Udyog Bharat 4.0 in 2021. This strategic initiative aims to bolster the competitiveness of the manufacturing sector, primarily focusing on the capital goods domain.

Moreover, the central government remains steadfast in promoting comprehensive national development by prioritizing the development of industrial corridors and smart cities, that feed into investment opportunities and capital requirements in the construction and allied industries. Per investment management company Colliers, upcoming planned industrial corridors are creating a conducive environment for industrial growth,
potentially generating employment opportunities for over 27 million workers.

Challenges and opportunities in the Indian manufacturing sector

As foreign manufacturers and investors consider entering the Indian market, they will have to navigate diverse challenges and opportunities inherent in the country’s manufacturing landscape.

Understanding India’s regulatory environment and its nuances across different states is paramount. Tapping into national industrial programs, including incentives for sunrise industries, can lower costs. Investing in complementary sectors may additionally be necessary to optimize operations and introduce management efficiencies. India’s technology sector present opportunities for innovative and hyperlocal solutions.

Recognizing India’s infrastructure deficits, particularly in port capacity, underscores the need for strategic investments in transportation and logistics infrastructure. Exploring partnerships with local entities and subscribing to government schemes can facilitate smoother entry into the market.

Moreover, aligning investment strategies with India’s burgeoning sectors, such as mobile phones, renewable energy, and advanced manufacturing, can position foreign manufacturers and investors for long-term success.
Ultimately, navigating India’s dynamic business landscape requires patience, strategic planning, and a willingness to adapt to local market dynamics. By leveraging opportunities and addressing challenges proactively, foreign firms can unlock the vast potential of India’s manufacturing sector. 

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