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Summary

In the past, India’s key reasons to expand its manufacturing footprint stemmed from the need to productively deploy its demographic dividends and as well as achieve a better balance of its growth drivers.

These domestic ‘push’ reasons have met with global ‘pull’ catalysts in the past two years. Trade conflicts, geopolitical fissures and inward-looking policies have convinced companies to better manage risks to their existing supply chains, providing an additional opportunity for India to attract part of these supply-side capacities. This is in addition to the economy’s longstanding attractiveness of a growing consumption market.

Towards this, India has rolled out a series of policy measures to attract global manufacturing firms, through a mix of ease of doing business as well as direct incentives. 


A beneficial shift in supply chains

We discussed ongoing fundamental shifts in India in India’s service trade is on a strong wicket), including policies tailored towards supporting and expanding the economy’s manufacturing footprint, as a source of improving trend growth and employment (India 2023 Outlook: Strategic opportunity, Understanding India: Growing footprint in electronics and Understanding India: Manufacturing push – a reset). In the past year, these efforts have gained further traction.

• An attractive destination

Over 70% of the surveyed firms signaled the intention to expand business in India over the next 1-2 years, outpacing regional peers (see chart), according to a recent survey by the Japan External Trade Organisation (JETRO). Firms picked high growth potential apart from improvement in local purchasing power as the top two reasons to expand business.
 

• The share of manufacturing exports rises, particularly in electronics

India’s exports of manufactured segments (engineering goods, chemical products, electronics, etc.) continue to climb, making up two-thirds of the goods basket last year. Growth in the labour-intensive segments moderated. Under manufactured goods, electronics exports are one of the fastest growing categories, up 24% on CAGR basis, between FY18 and FY23.
 

• A surge in domestic electronic production, including ‘Make in India’ phones

Encouraged by the strong export potential as well as interest in tapping domestic demand, domestic electronics production is up sharply. Mobile phone output has expanded by the most amongst the sub-segments (CAGR 34% between 2014 and 2022), followed by electronic components, consumer, and industrial electronics.
 

• FDI to reflect the benefits over time

The impact of the supply chain diversification and favourable macro backdrop is yet to materially reflect in the FDI flows.


Reforms and incentives

• Other industries and fiscal support schemes

Reforms have also been targeted towards the manufacturing sector, including a) the unified goods & services tax architecture has improved revenue collections, led to higher formalisation, and lifted tax efficiency; b) corporate tax reductions were a shot in the arm for manufacturing firms; c) infrastructure development by the central government, with states expected to participate in the coming years; d) sector-specific incentives including Production Linked Incentive (PLI) at $24bn, Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (SPECS), Modified Electronics Manufacturing Clusters (EMC 2.0), etc. We assess the progress of one of the key fiscal incentives i.e., the PLI scheme


Resilience on account of policy, progress, and people

Policy

India’s external vulnerability ratios will be tested against the global backdrop of aggressive rate hikes and rising growth slowdown risks. Encouragingly, the RBI has capitalized on weak US dollar periods and strong flows to replenish the foreign reserves utilised to keep the rupee relatively stable.

People

The UN estimates that India is on course to unseat China as the most populous country in the world this year. As much as this poses a challenge, there is also an inherent opportunity.

Progress (growth)

India’s recovery is driven by cyclical tailwinds, even as the pandemic-related boost fades. The incremental capital-output ratio has also recovered ground.


Rounding off

Beyond cyclical factors, structural changes, including the shift in the exports/manufacturing mix towards more high-tech sectors, supply chain tailwind, multi-year capex push, digitalisation, and relative strength in service trade (discussed here) are expected to emerge as medium-support support pillars for the economy. Political stability has also been an important cornerstone for overall macro strength. We also watch few risks on the horizon

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