The Covid-19 outbreak has exposed the vulnerabilities of complex global supply chains which are built on technology and manufacturing principles. The current situation has forced markets around the globe to either alter or reset their supply chains. This situation is an opportunity for India to position itself as a manufacturing destination in the medium term. India’s improving business environment and capability to enhance manufacturing and export will make the country a global manufacturing hub.
Factors invigorating Indian manufacturing sector
The Indian manufacturing sector has gone through major transformation helmed by significant reforms announced by the government in recent times. Strong macro-economic fundamentals, growth and demand potential, continued availability of skilled labour, FDI relaxations, strong political leadership, government spending on creation of supporting infrastructure, industry-specific policies, subsidies and incentive schemes along with improvement in the ease of doing business has lead to the sector’s growth.
In a major push to domestic manufacturing, the government has slashed the corporate tax rates of new manufacturing companies to 17.16%, the lowest in South East Asia. It has also identified large-sized land parcels across several states in the country that could potentially be offered to new manufacturing entrants. This, together with the relatively recent goods and services tax and low labour costs, is encouraging foreign companies to relocate their production bases to India, creating unprecedented demand for industrial and warehousing space nationwide.
Though several incentives have been announced in the recent past to encourage the manufacturing of bulk drugs, medical devices and electronic goods, the government needs to introduce policies from a long-term perspective to further improve India’s competitiveness. For instance, the government should look at further relaxing FDI norms and bring investor-friendly land reforms to boost manufacturing in the country. In the next few months, the government should focus on upgradation of infrastructure, reduction in approval timelines, and providing financial incentives for companies relocating to India.
India emerging as an alternate manufacturing investment destination
Business sectors in India have suffered a severe slump owing to Covid-19 and the subsequent lockdown, however, the outlook for the manufacturing and industrial sector is brighter than for most and is seen as the new sunrise sectors.
The industrial sector is set to benefit as multinationals seek to diversify their manufacturing locations. India is emerging as an alternate manufacturing investment destination for China. At this point, the world is looking at China plus one strategy for manufacturing solutions. There are over 1,000 foreign manufacturing companies that are planning to shift their manufacturing base to India from China, out of which 300 companies are actively pursuing production plans in mobiles, electronics, medical devices and textiles. This would lead to an increased demand for warehousing spaces across Tier 2 and Tier 3 cities of India such as Coimbatore, Vizag, Nagpur, Indore, Ahmedabad, Surat, and Jaipur particularly from growing sectors such as mobiles, electronics, pharmaceuticals, medical devices, FMCG, automobiles, food processing, and textiles.
Manufacturing companies from the USA, Korea, and Japan are already engaged in discussions at various levels with the Indian authorities to enter India. Japan has announced $2 billion in financial aid for its companies to shift production out of China. Countries such as the USA and Korea could follow Japan, exploring partnerships, joint ventures, development management contracts and asset acquisitions which are expected to benefit India leading to sizable investments into the country in 2020-21.
The investment cycle is on an uptick backed by the e-commerce boom, increased number of 3PLs (third-party logistics) improving infrastructure, and freight corridors. Investments in the form of debt funding, equity investments in rental yielding assets, and entry of new global and sovereign wealth funds can be expected in 2020-21. To add further, existing growth potential, the government’s clear strategy, strong leadership and India’s cost advantage will continue to help in attracting sizeable foreign investment into the manufacturing sector.
