It is said that “when all the stars align, magic happens”. The probability of a successful outcome is far higher when stars are aligned.
Often, we all wait long for certain things to happen which maybe a dire need of the hour, but it just doesn’t materialize for some or the other reason. Then a catalytical event occurs, which aligns all the stars favorably together, making it finally happen!
Manufacturing focus is one such thing which India has been long waiting and wanting to happen considering its importance and yet realizing its weak spot in the Indian economy. “Make in India” was one of the flagship programs of the NDA government, which unfortunately didn’t kicked off in the desired manner.
COVID has aligned all the stars for India’s Manufacturing Renaissance in times to come for several reasons. Let us examine why manufacturing is needed and what has changed.
Why is there need for manufacturing?
“No country is ever successful in the long term... without a really strong and vibrant manufacturing base.” Alan Mulally, Former President & CEO of Ford Motor Company.
Countries with a lower manufacturing contribution are extremely vulnerable to external shocks – e.g., Sri Lanka as it stands today, India in 1991, Greece post the 2008 financial crisis, to name a few. India got exposed to the 1991 economic crisis in a similar way to what Sri Lanka is facing today - lack of local manufacturing and over-dependence on imports. India opened up manufacturing post the crisis and saw a good progress in the 90s but again lost focus largely due to abundant cheap imports from China. The only reason why India did not undergo similar crisis despite having 15-16% GDP coming from manufacturing is thanks to our IT exports, which helped us pay our import bills. But if India is aspiring to be a USD 5 tn economy and to lift the living standards of her vast population, it is very risky and hard to do without any manufacturing prowess. It will always remain vulnerable to external shocks every now and then. Thus, it is very critical that India promote, develop and build local capacity and capabilities.
The above is not unknown but since our IT exports always provided the cushion, our policy makers never felt the need to act on improving on our manufacturing prowess. However, the current government is different – thinking and actively working on structural repair of the Indian economy.
We have discussed this briefly in the past as well - a mega opportunity is unfolding in the manufacturing space as we believe India is uniquely positioned to capture emerging global opportunity coupled with a strong domestic market as well.
India can well increase the share of manufacturing from 16% to 20% of GDP over the next 5 years. This will more than double India’s manufacturing GDP from USD 450bn to USD 1tn by 2027 - this massive shift will create multiple wealth creation opportunities across multiple sectors.
Let’s examine the enablers and outcome of this mega opportunity:
1. 4Ds: A Combination of the 4D’s is a big factor in the equation for the manufacturing eco system to flourish. There needs to be a strong need and pull factor for anything to happen, and we can sense this taking place. India with its 4Ds (Demand, Demographics, Democracy & Domestic markets) has a clear edge over here.
Demand: Post Covid, China + 1 is a big theme where most large companies across the globe are looking to diversify their supply chain from China to elsewhere. India will be a significant beneficiary of this trend as most companies are looking at India as a reliable source for manufacturing. This increased sense of urgency is creating a natural flow of inquiries/orders to Indian companies from buyers across the world. This is big change!! Earlier Indian companies had a long wait of a couple of years to get orders as the approval/sales cycles were very long, which now have reduced significantly - in many cases from years to months. This has encouraged and enthused Indian entrepreneurs to invest in capacities.
Domestic Markets: India at ~18% of the world’s population, is a large consumption market and most global MNCs are exploring expanding their base in India which provides a combination of a large domestic market and potential to export to other markets easily. Many global companies like Samsung, Apple, Foxconn etc. are setting up capacities in India. When such large global corporations set up capacities, it eventually leads to the creation of a strong ecosystem for component and ancillary industries. Much like how Maruti evolved into a manufacturing giant over the years and created an enabling component manufacturing industry.
Demographics: India has one of the largest young population in the world, with a median age of ~28 years vis-à-vis 38, 38 and 34, United States (US), China and Brazil respectively. India is witnessing rising per capital income and improving living standards. India’s demographics not only makes availability of required manpower but also in turn creates a huge demand for products.
Democracy: Unlike China, India with its democratic government, stable policies and open-economy structure provides an attractive choice for the global investments. Inter-state competition to attract investment is making things only better from the past.
2. Cost competitiveness: It is now well established 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 (USD 800 in China vs USD 250 in India), power costs are similar, taxation is lowest (lowest globally) - this provides India a competitive edge to increase its share in global manufacturing. India lags in terms of economies of scale where China has a distinct advantage. The recent PLI scheme aims to bridge that gap and considering other advantages which India offers, it will be very difficult for global entrepreneurs to ignore India.
3. Atma Nirbhar Bharat initiative: Recognising the above and in a journey to make Indian economy self-reliant, the Indian Govt. introduced an Atmanirbhar Bharat Abhiyaan with an outlay of INR 20 lakh crores - equivalent to 10% of India’s GDP. The scheme is designed to reduce the dependence of the Indian economy on critical resources like semi-conductors, defense, APIs and medicines, chemicals, auto and auto ancillaries, energy needs, data centers, etc.
“See defence as a big boost in the years to come. Opportunity is in excess of INR 5 lakh crore, these are already approved, these are the projects where acceptance of necessity has been granted. More than 85% of this will be domestically procured.” - L&T Defence – JD Patil – Senior VP
PLI: PLI (part of Atmanirbhar) scheme was launched in March 2020 with mobile manufacturing, and gradually expanded to over 15 sectors with a total outlay of INR 1.93tn (~USD 26bn). As per CRISIL, the PLI scheme will lead to a potential capital expenditure of INR 2.5-3tn (~USD 33-40bn) and potential revenue generation of INR 30-35tn (~USD 400 bn) over next 4-5 years.Each PLI scheme is applicable for a 4-7 year duration period and offers incentives as a percentage of incremental revenue which vary from 5-6% for mobiles and white goods and 5-20% for pharma API/KSM to 8-18% for auto and auto-components."The inclusion of high-demand high-technology items such as semi-conductor fab, IoT devices and ACC batteries in the newly announced PLI scheme will greatly boost India's manufacturing capacities and catapult it among major manufacturing hubs. We are looking forward to a huge positive impact." – Baba Kalyani, CMD, Bharat Forge. A snapshot of the bifurcation of expected capex on account of PLI in major sectors is as below: (Source:CRISIL)
Non-Tariff Barriers: India has never used non-tariff barriers historically. However, this time around, India has committed to providing non-tariff support to Indian manufacturers which is huge comfort for Indian entrepreneurs. Many countries like China, Japan, Korea has used procedural barriers to protect domestic industries but India somehow hesitated. (as is visible from the graph). This has changed and will go long way in protecting Indian manufacturers.
4. Capital availability & Capex: Banks are well capitalized now than ever before with Tier 1 capital at its best and leverage at its lowest as depicted below. NPA problems are behind, and banks are now looking for growth. Retail growth has been robust, and with the capacity utilization’s picking up, it is a matter of when (and not if) that we see corporate credit growth picking up.
5. Revival of Capex cycle: Government’s capital expenditure as a % of GDP has been on a constant rise, with highest ever amount at INR 7.5tn in the budget gone by. Private capex was at one of the lowest in FY 21 during last 15 years, but with new areas of manufacturing opening led by the import substitution and export theme, we believe that all the avenues are now aligned for a private capex upcycle
When a long-term trend starts, it is always initially met with scepticism, but if one focusses on understanding the underlying drivers/enablers, one can build conviction. We are convinced that this time this trend and the change which has begun, has a very high probability of fructifying as most stars seems to be aligned.
What is the likely impact and opportunities of this?
We believe that these enablers and the government’s push to create India as a manufacturing hub will have a multiplier effect on the overall Indian economy.
Manufacturing growth will lead to massive job creation. PLI scheme alone is expected to create 6mn jobs. If we assume a 10% salary & wage payout, on an incremental USD 500 bn manufacturing GDP, incremental payout will be USD 50bn, which is 5x of MNREGA. Further, this will lead to a multiplier effect on the Indian economy as for every one job in formal sector 3 additional jobs are created in ancillary services.
Manufacturing is expected to boost exports (last year we hit USD 430bn, all time high number) and reduce import. The PLI scheme is expected to shrink the Indian trade deficit by USD 50bn. This has a huge positive impact on the structural repair of economy. A positive trade balance allows a country to manage its finances without any external dependence.
"The new PLI policy is transformational and timely and will facilitate India in becoming a global manufacturing hub. The policy is strategically targeted and will go a long way in boosting production, making Indian goods competitive and expanding exports as part of global value chains," - Uday Kotak, President, CII and MD, Kotak Mahindra Bank
Six MNC’s have opened innovation/development centres for global delivery in India in the month of March 2022 itself. (ABB, Lowe’s, GE Healthcare, IBM, Trimble and Amazon)
Never before we have seen so many factors come together all working in one direction – a perfect recipe for wealth creation through the Lollapalooza impact. We expect it to create a virtuous circle of investment cycle and higher GDP growth which can provide a big wealth creation opportunity for the financial investors.
We think this alone has the potential to create wealth to the tune of USD 800bn - 1tn over next 5-7 years. Let the Magic Begin!!
“My only suggestion to foreign investors is to have a thought of being very long on India. You have a large economy with a strong democratic set-up.” - Sanjeev Sharma – CMD - ABB India.