July and August 2014 |
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The Indian Advantage: Asia’s
Next Manufacturing Juggernaut
– By
Dezan Shira & Associates
According to Deloitte’s Global Manufacturing Competitiveness
Index, India is currently the fourthmost 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 hinderedmanufacturing 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to the country’s outdated transportation and power supply networks.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 lowpolitical
risk. As the BJP mulls an overhaul of India’s antiquated labor laws
and the introduction of China-stylemanufacturing incentives to the
country’s FY2015 budget, India’s competitiveness as amanufacturing
and sourcing jurisdiction is set to increase substantially in the near
to medium-term.
The Indianmanufacturing 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. Organizedmanufacturing 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.
Accounting for 15 percent of India’s total GDP, the manufacturing
sector has grown steadily in recent years as rising costs in China and
elsewhere have led foreign firms to seek out alternative locations for
manufacturing and sourcing operations. Between 2006 and 2011,
India’s manufacturing sector sustained a compound annual growth
rate (CAGR) of 17.1 percent, principally in textile goods, engineering
goods, automobiles, and chemicals. At the current growth rate, the
McKinsey Global Institute projects that by 2025, the sector will reach
a value of US$1 trillion, account for 25-30 percent of the country’s
overall GDP, and generate up to 90 million new domestic jobs.
Low-cost labor force
India’s manufacturing wages
are among the lowest
worldwide, averaging
US$1.50 per hour.
Demographic dividend
India’s abundant labor force
is English-speaking, young,
skilled, and cost-e cient.
Currency
The rupee’s falling value against
the dollar makes Indian exports
increasingly competitive as the
yuan continues to rise in value.
Growing domestic market
Rapid economic growth
provides a large domestic
market for manufacturers.
Infrastructure
investment plans
The Indian government plans to
invest US$1 trillion in infrastruc-
ture through 2017 to lower
logistics and supply chain costs.
Free trade agreements
One of more than 10 free trade
agreements India is signatory to,
the ASEAN-India Free Trade Area
provides companies access to one
of the world’s largest FTAs.
India’s Manufacturing Sector at a Glance
Share of GDP
15%
Share of global manufacturing
2.1%
Growth in 2012-13
1%
Average hourly compensation
US $1.50
Key industries
Textiles, engineering goods, automobiles,
electronics, chemicals, paper
The Indian Advantage
