The worlds next factory

The worlds next factory

Prime Minister Narendra Modi's programme to make India a major global manufacturing hub is likely to start showing results when the $68-billion of investments committed on the ground start coming on stream over the next couple of years. Critics complain that the glass is half empty. The Prime Minister's Make in India initiative has not led to any increase in the share of manufacturing in the country's GDP and has not generated the huge number of jobs it was expected to. But that, pardon the pun, is only half the picture. Experts point out that the manufacturing sector begins to contribute to the economy only with a lag of three-four years and point to the pipeline of about $68 billion of foreign investment, much of it in the manufacturing sector, to argue that a better way of describing the glass would be as half full. Why manufacturing is important Every year, an estimated 12-15 million youngsters enter India's job market. India's pre-dominantly service sector-oriented economy is not structurally capable of absorbing this massive influx of human resources. The only sector that can is manufacturing. Then, rising costs in China are also prompting many of the world's largest companies to consider setting up manufacturing bases in alternative locations. So, the time may also be propitious for India to present itself as that alternative. Thus, the Narendra Modi government has unveiled the ambitious Make in India initiative to place India on the world map as a manufacturing hub. The Indian manufacturing sector, which currently accounts for about 16-17 per cent of the country's GDP can potentially ramp up to 25 per cent share by 2025 and reach an annual turnover of $1 trillion by then, creating in the process up to 90-100 million additional jobs both directly and indirectly. Many global giants such as Apple and its contract manufacturers such as Foxconn and Wistron, auto giants such as Suzuki Motor Company, Ford Motor Company, Hyundai, Volkswagen and Toyota Motor Company as well as others such as GE, Siemens, Toshiba and many others have already set up, or are in the process of setting up, manufacturing plants in India not only to cater to domestic demand but also to sell in other markets such as the Middle East, Africa, East Europe and elsewhere. Significantly, FDI, the main driver of India's manufacturing sector in recent times, grew 82 per cent year on year to more than $16 billion during the April-November 2016 period. FDI the key India needs FDI as much as the foreign investors need India's low cost manufacturing bases to make their products and the country's vast domestic market to sell their goods in. A major roadblock to faster growth rates - a necessary pre-condition for generating jobs, spreading prosperity and lifting millions out of poverty - is India's creaking and outdated infrastructure. Finance Minister Arun Jaitley has said India needs approximately $646 billion over the next five years to fix the country's infrastructure. That's about $129 billion every year for five years. Jaitley has taken the lead by allocating $90 billion on infrastructure creation and renewal in this year's Budget. With private sector investments remaining tepid and banks unable to lend because of the NPA overhang, FDI remains the only route to make up the deficit.

Early success stories

South Korea's Kia Motors recently announced that it will invest $1 billion in setting up a new plant in India - most likely in Andhra Pradesh. This will provide a huge impetus to India's already world class automobile sector. Every major car company in the world has a significant presence in India, which exported about 670,000 passenger cars to markets across the world last year. Total passenger car production in India also cross the three million mark, making the country the world's XXth largest auto market in the world.

The Foxconn coup

Foxconn, the Taiwan-based electronics company, is the world's largest contract manufacturer of electronic products - mainly mobile phones. It is famous the world over for making Apple's iconic iPhones. Its main manufacturing base is in China. So, it was nothing short of a coup when the Indian government succeeded in convincing it to invest $5 billion in India in setting up plants to make mobile phones, chargers, batteries, cables and headsets for exports to developed markets such as Europe and the US. “India is already high on our priority list, and we plan to step up investments and business here by opening new factories and expanding our manufacturing footprint,” a senior Foxconn executive has been quoted as saying to the Indian media. Foxconn is expected to invest almost 60 per cent of its proposed investment to set up a display fab unit in India, a completely new line of manufacture in India. The company also plans to make printed circuit boards, a key component of electronics devices, in India. The company currently makes phones for companies such as Xiaomi, Oppo, Gionee, Nokia and InFocus in India and is planning to vertically integrate its operations in this country.
GST push
The introduction of the Goods and Service Tax is a huge positive for the Make in India initiative, several studies and early evidence from the market show. The common procedures for registration, payment of duties, filing of returns and refund of taxes and the seamless flow of input tax credits from manufacturers and suppliers to the retailer will eliminate the cascading effects of taxes, make many products cheaper and boost the manufacturing sector. This will boost investments under the Make in India initiative and help turn India into a manufacturing hub. It will also generate massive employment as a result of the increased economic activity. In particular, it will give a massive boost to the electronics and automobile sectors, among several others. The structure of rates in the GST is designed to encourage domestic manufacturing. The domestic electronics manufacturing sector, which is a major employment generator, for example, is projected to grow from $31 billion in 2015 to $104 billion by 2020, largely on the back of the favourable GST rate structure, says a report titled Electricals & Electronics Manufacturing in India based on a study conducted by industry chamber Assocham and NEC Technologies. “GST will give a major boost to the Indian electronics industry thereby, leading to subsequent increase in demand of locally-manufactured electronics," the report says. The authors of the report estimate that Indian manufacturers will save about 5-8 per cent of their costs as a result of lower warehousing and logistics expenses and the elimination of the cascading effects of taxes on taxes. This will help them lower the prices of their products and enable them to gain market share from importers. The imposition of GST will also make cars cheaper. According to early calculations, prices of cars have fallen between 1.7 per cent at the entry level and 8-9 per cent at the top end. This means cars have become cheaper by Rs 5,000 ($80) to up to Rs 1 crore ($150,000). This, experts said, will lead to a spurt in growth in the automobile sector.

Government eases the way

In order to encourage the manufacturing sector and push the ′Make in India′ initiative, the Government of India has, in its last Budget, reduced the corporate tax rates for MSME companies with a turnover of up to $7.6 million. As in most economies, it is this sector that does the bulk of the heavy lifting both in terms of providing intermediate goods to the large scale sector and also in terms of generating the maximum employment. Then, the Ministry of Labour & Employment has proposed to exempt MSMEs from several inspections to encourage and promote manufacturing in the country. There is also a proposal to introduce a Make in India Green Channel to ease procedures and reduce the cargo clearance time at ports to just a few hours (from about a week at present) to encourage the domestic manufacturing sector. These are among several other initiatives undertaken by the Centre and states such as Gujarat, Uttar Pradesh and others to push the Make in India initiative.

In the pipeline

The $30-billion Indian capital goods sector is currently languishing for want of orders. This is, in large measure, a result of the inability of India's home grown industry to increase their investment rate. To help overcome this situation, the government has unveiled an ambitious plan to manufacture as many as 181 products within the country. This will help large infrastructure and employment-intensive sectors such as automobiles, oil and gas and power sector revive the investment cycle and push the economy into a higher growth trajectory. There are also a host of other big ticket projects such as industrial corridors connecting important industrial and commercial centres across the country, smart cities, inland waterways on major rivers and a string of ports across India's 7,500 km long coastline, all of which will generate huge demand for materials and products that will, in turn, encourage the domestic manufacturing sector to step up investments to meet the burgeoning demand.
Patience is the watchword
The glass, as we have said at the beginning of this article, is half full. The Make in India initiative is a work in progress; its benefits will become tangible only after the plants and factories that are currently being built go on stream and start producing the goods they are designed to make. The early trends are encouraging. The investments on the ground as well as those in the pipeline look strong. So there is every room for optimism that despite the naysayers, the Make in India initiative will strengthen India's manufacturing sector and, over a period of time, help the country emerge as a global manufacturing hub.

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