By Shawn Greene
According to Deloitte’s Global Manufacturing Competitiveness Index, India is currently the fourth most competitive manufacturing destination worldwide and is forecast to become second only to China by 2018. Although India’s appeal as a manufacturing and sourcing jurisdiction comes primarily from its labor cost advantage, the country’s poor infrastructure and complex regulatory environment have hindered manufacturing sector growth in recent years. With Narendra Modi’s BJP now in control of the country’s first majority government in three decades, India will soon be poised to undermine China’s manufacturing edge through the introduction of policy and labor reforms, investment incentives, and improvements to the country’s outdated transportation and power supply networks.
Infrastructure and regulatory obstacles aside, India features nearly all of the key ingredients necessary to transform its economy into a manufacturing juggernaut: a demographic dividend, attractive domestic market, comparative advantage in shipping and labor costs, an inexpensive currency relative to the dollar, and low political risk. As the BJP mulls an overhaul of India’s antiquated labor laws and the introduction of China-style manufacturing incentives to the country’s FY2015 budget, India’s competitiveness as a manufacturing and sourcing jurisdiction is set to increase substantially in the near to medium-term.
The Indian manufacturing sector is commonly divided into organized and unorganized segments that correspond with what economists traditionally refer to as “formal” and “informal” sectors in developing economies. Organized manufacturing refers to activities carried out by businesses that are officially registered with the government, while unorganized manufacturing is conducted by smaller, unlicensed enterprises and often features low wages, unstable and irregular employment, and weak or nonexistent government protection for laborers.
Despite recent progress towards modernization, India’s unorganized sector still accounts for around 80 percent of all employment in manufacturing—emblematic of many developing economies which typically feature around 90 percent of all workers in the informal sector. It is India’s organized manufacturing sector, however, that is of primary interest to foreign investors and which—despite employing significantly fewer laborers—generates over two-thirds of the country’s total manufacturing output.