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Bharat Amritkaal Series – India, factory to the world

Greetings from Team Carnelian!


Mega trends are generally born from the congruence of several factors acting in a common direction, resulting into a nuclear chain like reaction, continuing exponentially. One such mega trend we see emerging from the tectonic shifts happening in India, is the emergence of manufacturing. We had written about this in our letter in August 2020 (Emergence-of-a-new-trend) and re-iterated the same in April 2022 (Manufacturing-all-stars-aligned). As a part of the Bharat AmritKaal Fund series on Mega trends, we can’t help but write again as this is here to stay for very long. We are refreshing this with new perspectives.


The manufacturing sector currently accounts for a mere 16% of India’s GDP. For decades, India has been recognized for its prowess in sectors like information technology and other services; we leapfrogged from agriculture to services, but we have been lagging in manufacturing. Any country with this low a proportion of manufacturing in its total GDP is highly prone to external geopolitical and economic shocks (e.g. Sri Lanka, Turkey, Pakistan).


Recognizing the above, the Indian government has undertaken a series of transformative reforms over the last 10 years with an aspiration to make India a global manufacturing hub. Moreover, during Covid times the supply chain shock from China in addition to it’s current global geopolitical equation, has forced the world to reduce their overdependence on China. India, besides having established itself as a reliable trade partner, the competitive cost dynamics, availability of talent and other resources along with one of the fastest growing domestic markets provides a perfect destination for being a global manufacturing hub.


This mega trend of manufacturing will lead to huge wealth creation opportunities in various sectors/subsectors which will see sizable growth in the initial years, followed by many years of superior compounding opportunities.


“History doesn’t repeat itself, but it does often rhyme”- Mark Twain


We have all heard the story of how China became a manufacturing giant but before China we had Japan, Germany and South Korea which evolved as manufacturing exports driven economies of the world. We see many similarities in the factors which led to their growth then and are now present in India today.


Let us understand from history what led to their rise.


Japan became the world manufacturing hub post WW2. Japan had lost everything during the World War in 1945. Post the war, Japan has evolved as one of the leading economic growth contributors to the world GDP led by factors such as decisive leadership, technological change, increased availability, and efficiency of labour and increased international trade. Through strategic planning and co-operation by firms, individuals and the government, Japan become the third largest economy of the world. From 1955 to 1990, Japan's economy experienced a period of rapid growth known as the "Japanese Miracle", with an average annual growth rate of 6.8% and GDP multiplying by 8x over this period.


Between 1953 to 1965 Japan’s manufacturing grew by ~13% annually while GDP expanded by 9% each year. The share of manufacturing in GDP increased from 28% to 36%. Japan’s current account balance which was largely deficit through the 1950s and early 1960s, started improving resulting into a large surplus in the early 1970s - huge wealth creation was witnessed during the early phase of this transformative journey. Prices of stocks like Sony rose from 700 yen to ~5,850 yen over 3 years by 1969 while Honda Motors rose from 130 yen to ~1,120 yen between 1971-1973.  


Germany was not a leading industrial power until 1870. Bismarck, who became the chancellor of Germany in 1871 implemented several policies to protect German companies including imposing heavy duties on foreign goods, thereby promoting domestic German goods. This eventually strengthened their industries and economy, giving rise to some of the large industrial groups like Volkswagen, BMW, Siemens BASF etc. during this period which were significant wealth creators.


Post the Korean war in 1961, South Korea wedded to an import substitution regime that seemed unrealistic in a small, resource-poor country. Largely unnoticed by most foreign observers, South Korea started reforming its social structure and education by making the technical training mandatory under the leadership of Park Chung Hee.  This helped the country in moving towards an export-led development path. Exports ramped up to almost 42% of the country’s GDP, making it a developed economy. Some of the companies which were created during this period - Samsung, LG, Hyundai etc. eventually become global giants.


Learning from history - Whether we look at the Japanese economic miracle led by Prime minister Hayato Ikeda, German transformation to Industrial powerhouse led by Bismarck or when we look back at South Koreas economic revolution led by Park Chung Hee - all 3 countries have one thing in common - decisive leadership which led to favorable government policies and reforms, economies of scale, improvement in labour productivity as well as tariff and non-tariff barriers which led to their transformation as manufacturing powerhouses and creation of enormous wealth. India today, under the leadership of Prime Minister Narendra Modi also is on a similar path.

1.  Government Reforms – a catalyst for change 


  • Improving Infrastructure: Investing in infrastructure development through the National Logistics Policy, Bharatmala (2015), Sagarmala (2016), PM Gati shakti dedicated freight corridors (DFC) and industrial corridors, have strengthened the logistic connectivity bringing down logistics cost for businesses. India’s performance in World bank logistics performance index has improved from 54th(2014) to 38th(2023).

  • GST: Implementation of a unified tax system (GST) has boosted the nation’s economy, unified its market, leading to free flow of capital and services.  This has improved the Ease of doing business ranking to 63 as per World Bank.

  • Easy availability of Capital: Capital is like oxygen to a business. With the implementation of GST and various other policies, access to equity and banking credit has become relatively easier than ever before, thereby reducing the cost of capital for businesses.

  • Easing Regulations: Streamlining regulations and bureaucratic procedures such as the National Single Window System, Insolvency and Bankruptcy Code (IBC) etc. to make businesses easier to establish and to operate.

  • Skills Development: The Indian government is providing support to develop the skillset/capabilities of the workforce. The Ministry of Electronics and IT (Meity) has set up the Center of Excellence (CoE) to build a design ecosystem in India and launched new skill development centers to supply skilled manpower.

  • Reforms foundation strengthened through PLI:  The PLI Scheme, as envisioned, encompasses 14 sectors – has an incentive outlay of Rs.1.97 lakh crores which will lead to a capex of Rs.3-3.5 lakh crore. This will strengthen our production capabilities and help create global champions. The underlying principle is to grow scale and make India globally competitive. 


2.  Cost Competitiveness: It is now well accepted that India’s cost competitiveness has increased over the years due to rising costs in China. India’s labour cost is 1/3rd of China, power costs are similar, taxation is lowest (globally), thus providing India a competitive edge which will help in increasing its share in global manufacturing.


3.  Favorable external environment: Geopolitics is also forcing many global companies to set up facilities in India. Their interest in India stems from supply chain disruptions caused by Chinese government officials intervening into business operations, and forcing them to transfer technology to domestic companies. This is prompting many companies from the U.S. and west to follow a “China + 1” strategy, diversifying supply chain operations outside of China.


4.  Economies of Scale: India imported USD 464bn worth of manufactured goods in 2023, equal to its current manufacturing GDP - just by being Aatmanirbhar (import substitution of manufactured goods), India can double its manufacturing GDP. In 2023, India exported USD 290bn worth of goods while China exported USD 3.38 tn worth, showcasing the immense opportunity available.


Opportunities for India in Manufacturing


As increased focus on manufacturing, it is expected to grow ~13x during the Amritkaal period with a large part of the growth being front ended in the first 10 years.  Within those EMS, Chemicals, Defense, Pharma, Textile and Auto will be the key sectors which will drive the growth. Some of the sectors like EMS will see a non-linear growth to become 45x during the Amritkaal period.

Anchor companies set the trend and initiate the ecosystem for that industry.

In the aircraft manufacturing sector, Boeing is reportedly sourcing more of its supplies from India and is said to be looking at setting up a local manufacturing facility. Denmark’s Vestas, the world’s largest wind-turbine maker, has built two new factories in India. Tata group recently announced a semi-conductor plant with an investment of USD 10 bn and further OSAT plant with an investment USD 3 bn.


Since 2018, exports of completely built units of electronic goods, including smartphones have tripled to reach USD 23 bn in 2023. Foxconn, which assembles ~70% of the world’s iPhones, has decided to invest an additional USD 1.67 bn in India. Apple itself is expected to manufacture 20mn iPhones by 2024 and move ~25% of all iPhone manufacturing to India by 2025 – making it a Maruti moment in Mobile manufacturing where ancillary industries will be built to cater to the Apple’s production demand  requirements as we have earlier seen how anchor company creates the ecosystem for the industry.


From 2018-2022, overall Indian exports to the U.S. surged by 44% to reach USD 23 bn. In terms of percentage growth, specific sectors have been outliers. American firms purchasing auto components  from India have risen by 65%, mechanical machinery by 70% and semiconductor shipments by a remarkable 143%. While, China's exports to the U.S. in each of these categories decreased by 29%.

Over the last 23 years, even with an 11x growth in the Auto Industry, companies such as TVS motors have grown profits by 24x and stock price has risen by 88x. The chemical sector has grown at 3x but companies like Aarti Industries have grown profits 24x and stock prices by 298x!!! This kind of exponential wealth creation opportunities will emerge in future too as India becomes the next manufacturing giant.


Made in China -> Make in India - > Make for the World


India and the world use to depend on “Made in China” products. Post 2014, our honorable Prime Minister coined the term “Make in India”, with Lion as it’s logo. Besides symbolizing manufacturing strength and national pride, the logo more importantly denotes India’s Lion step towards becoming a manufacturing powerhouse. India possesses substantial potential to capitalise on heightened supply chain, emerging as a crucial alternative hub for enterprises seeking to relocate manufacturing operations away from China. With China's economy slowing and the West seeing it more as a rival than an economic partner currently, it is creating opportunities for India, which will accelerate our journey to become the world manufacturing hub. With an aspirational population of 1.4 bn, manufacturing share of GDP is set to rise to 28% during AmritKaal period of its journey to become a develop nation – Viksit Bharat by 2047.

Read our previous letters on Amritkaal series.

March-24 : Bharat Amritkaal!!! - The India story re-begins…

April-24 : Biggest Mega Trend - Youngest, largest & aspiring!

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