Manufacturing

India is on the cusp of a multi-billion, multi-decade manufacturing boom considering,

Whenever a new trend emerges, it emerges gradually in the initial phase, thereafter, attaining a snowball kind of effect over a period of time.

 

Global diversification from China

China currently contributes 28% to the global manufacturing and 50+% of global supplies in several sectors. The China-US trade war and the current Corona crisis has shaken the confidence of western world and many countries are exploring options to reduce dependence on China. India emerges as a strong contender to capitalise on this opportunity as a preferred partner.

 

Some initial trends of import substitution and global supply chain diversification

Recent government reforms:

At 1.7%, India’s manufacturing export share is a tiny fraction of China’s (~13%). The government being cognizant of this, aims to raise the manufacturing sector’s contribution to GDP to 25% from the 16% currently (3x opportunity over next 5 years) and has implemented a series of reforms to push manufacturing in India.

Some of the prominent reforms are reduction in direct tax rates making it the lowest in the world, state level labour reforms, usage of non-tariff barriers, setting up industrial parks, production linked incentives and many more. All these coupled with earlier carried out reforms like GST, FDI, DFCC makes it a very good probability.

 

Technology

The Covid pandemic has fast forwarded the adoption of digital technologies, making it an area of primary focus across the world. Generally higher technology spends by developed markets have had a strong positive correlation with the outsourcing growth and we believe, this time should be no different.

 

The digital segment of India’s IT service exports is expected to grow at a CAGR of 22% over the next five years from ~USD 60bn in 2020E to ~USD 150bn in 2025E leading to incremental revenues of ~USD 90bn.

The first wave will be cloud migration followed by development of various applications/products for the new cloud environment. Indian IT Inc. are also best positioned to capture the emerging inorganic growth opportunity – Big will become bigger. Indian IT players are also uniquely positioned to capture a plethora of opportunities into the ER&D space. We foresee a ~USD 30 bn of opportunity for the Indian IT ER&D players over next 6 years.

 

We believe that we are at the beginning of the 4th wave of growth for the Indian IT sector

Although the demand is global, we believe Indian IT companies are best placed to capture these industry tailwinds due to the ability to weather all previous cycles and also the ability of Indian IT companies to foresee structural trends and be ahead of the curve. Today all Indian IT companies have capabilities in the future growth areas of digital, cloud and ER&D which are all likely to see accelerated growth over the next few years.

© Carnelian Asset Advisors LLP. 

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