corenet global report make in india: a manufacturing

MAKE IN INDIA: A MANUFACTURING INITIATIVE 1

PRIORITYRESEARCH

EXCLUSIVE

RESEARCH

by Sonali Tare

C o r e N e t G l o b a l R e p o r t

MAKE IN INDIA:A MANUFACTURING INITIATIVEMAKE IN INDIA:A MANUFACTURING INITIATIVE


Introduction and Economic OverviewThe Indian government has put in place “Make in India,” an initiative to encourage additional manufacturing by creating an environment conducive to its growth and development. The aim is to increase manufacturing’s share of GDP from 16 percent (where it has remained stagnant for a few years) to 25 percent, and create an additional 100 million manufacturing jobs by 2022.1

The Make in India initiative was introduced in 2014 and put into effect several intertwining policies that would eventually allow for manufacturing and industry to grow in India. “The government is keen on India increasing its manufacturing base and competing with China. While China and India are compared to each other on a regular basis, currently, China’s middle class population and general growth are more robust. To catch up to China, India will need to increase its manufacturing capabilities, which will, hopefully generate employment,” says Yogesh Shevade, an End User/Occupier based in India.

India’s buying power has grown significantly along with the growth in its economy. India has the third highest global purchasing power parity, after that of the US and China.2 There is also tremendous economic power in India’s ever-growing cities. As the graph at right shows, by 2030 cities such as Mumbai, Delhi and Bangalore will compete in terms of size of economy with entire middle-income countries like Philippines, Malaysia and Morocco.

Government Policies: Gains and Challenges In order to fast-track this economic growth, the Make in India initiative was launched to boost employment and cater to the growing demand for consumer products. Through policies that would allow for easier factory and manufacturing set-ups, increased foreign direct investment (FDI), and easier buying of land, amongst other goals, the government hopes to see a meaningful and substantial impact on how the manufacturing industry performs.

MAKE IN INDIA: A Manufacturing Initiative

1 “Make in India: National Manufacturing Summary,” Government of India, (http://www.makeinindia.com/policy/national-manufacturing)

2 “India pips Japan to be 3rd largest economy in purchasing power,” Hindustan Times Online, April 30, 2014 (http://www.hindustantimes.com/business/india-pips-japan-to-be-3rd-largest-economy-in-purchasing-power/story-26tQH7E1M6EvVV3f1qw4RL.html)

3 “India’s ascent: Five opportunities for growth and transformation,” McKinsey Global Institute August 2016, Noshir Kaka and Anu Madgavkar

3


“All of these policies are likely to make it easier to start and conduct a business in India. This might, in turn, improve its ranking in the global ‘ease of doing business’ indices,” says Surabhi Arora, Senior Associate Director, Research Services at Colliers International. India has already seen some improvement of its score on a number of indices, since these policies went into play. For example, it jumped 4 places, from its rank in 2015, on the World Bank’s “2016 Ease of doing business” index.4 While it improved only 1 place from 2016 to 2017, there are several specific points on which there was a more substantial improvement.5 For example in two cities surveyed, Delhi and Mumbai, the amount of time it takes to get an electricity connection reduced from 4 months to 45 days. Overall, it is now easier and quicker to get electricity, and this has resulted in bringing India to number 26th on ease of getting a power connection. This is up from 51st in the year before.6

Though there has been progress made on some points, there is much more work to be done, if India is to continue to be competitive and improve in relation to other growing economies. The graph below illustrates how India compares with other emerging economies as well as economies in the region on the “Ease of doing business” index.

4 “India moves up in ‘ease of doing business’ ranking,” The Hindu Online, Varghese K George, September 1, 2016 (http://www.thehindu.com/news/national/india-moves-up-in-world-bank-doing-business-2016-ranking/article7811248.ece)

5 “Doing Business 2017: Equal Opportunity for all – Economy Profile 2017 – India,” World Bank (http://documents.worldbank.org/curated/en/299421478509032680/Doing-business-2017-equal-opportunity-for-all-India)

6 “Why India Isn’t Climbing Ease of Doing Business Ranking Despite Efforts,” The Wall Street Journal, Raymond Zhong and Rajesh Roy, October 25 2016 (http://blogs.wsj.com/indiarealtime/2016/10/26/why-india-isnt-climbing-ease-of-doing-business-ranking-despite-efforts)

7 “Doing Business 2017: Equal Opportunity for all – Economy Profile 2017 – India,” World Bank (http://documents.worldbank.org/curated/en/299421478509032680/Doing-business-2017-equal-opportunity-for-all-India)

World Bank: How India and Comparator Economies Rank on the Ease of Doing Business Index7


8 “India overtakes Indonesia, Philippines on competitiveness index,” Nikkei Asian Review, Kiran Sharma, September 28, 2016 (http://asia.nikkei.com/Politics-Economy/Economy/In-dia-overtakes-Indonesia-Philippines-on-competitiveness-index)

9 “India: Global Competitiveness Index, 2016-2017 edition,” World Economic Forum (http://reports.weforum.org/global-competitiveness-index/country-profiles/#economy=IND)

10 “India: Global Competitiveness Index, 2016-2017 edition,” World Economic Forum (http://reports.weforum.org/global-competitiveness-index/country-profiles/#economy=IND)

11 “FDI inflows into India jump 18% to a record $46.4 bn in 2016 despite global fall,” Livemint.com, February 22, 2017 http://www.livemint.com/Politics/JV5cFZfUieY1Orp5bL8SqM/FDI-inflows-into-India-jumps-18-to-a-record-464-bn-in-201.html)

India has also done well on other major, global indices, such as the World Economic Forum’s “Global Competitiveness Index.” On the most recently released index, India has leapfrogged 16 places, from 55th to 39th of 138 countries on the index. Comparatively, other regional markets, such as Philippines, Malaysia and even Japan have slipped on their scores from the previous year.8

There are still major improvements that India will have to make, if it is to continue on this path. For example, labor market inefficiencies mean that India is ranked 84th on this aspect. Similarly, improving infrastructure and enhancing access and usage of technology would boost India’s positions up from 68th and 110th respectively.10

In addition to the impact on global indices, these policies have been significant from the point of view of how they’ve impacted FDI. “The inflows of FDI have increased, since not only is it now easier to conduct business in India, but the government has also opened certain sectors up, which were not accessible to foreign investors before,” says Sanjay Dutt, CEO- India Operations, Ascendas-Singbridge. This has been an important part of the government’s plan to attract investment to India, including that tied specifically to manufacturing.

In 2016, FDI into India rose by 18% to $46.4 billion, a record. This is especially significant, considering that global FDI inflows reduced by 13% in the same year.11 Among the sectors that the government has opened to FDI are, defense manufacturing, pharmaceuticals, pensions and insurance, e-commerce, and air-transport amongst others. These sectors have an automatic route, meaning that they do not require

World Economic Forum: Most Problematic Factors for Doing Business9


government approval for FDI to come in. Other sectors have also been made accessible, but require government approval depending on how much of a project’s investment comes via FDI. These sectors include print media, mining of titanium bearing minerals, satellite operations, private and public sector banking, etc.12 “All these policies that are being put into play are helping build an image of India that is politically and economically more stable than in the past. This is attractive, especially to FDI,” says Dutt.

Furthermore, government priorities already in place, such as emphasis on improvement in general infrastructure, creation of Special Economic Zones and the lead taken by some of the individual states to make it easier to conduct business have also had a role to play in terms of making India a more attractive business destination.

There are several over-arching policies that the government has initiated in the past couple of years that will impact the Make in India initiative:

• Digital India

Digital India is a government initiative to increase and improve digital accessibility in India. In addition, it seeks to simplify a citizen’s access to the government via online portals. There is also a robust effort to ease bureaucracy by making it easier for citizens to access government services, pay bills, and fill out forms. “You no longer have to stand in line to pay electricity and water bills. You can use the online portals that have been made available by the government to do that. It’s simplified lives, especially in the cities, by cutting out commute time taken to go from one office to another,” says Shevade.

This increased emphasis on digitization means that there will be a growing demand for digital products, such as computers, phones, tablets, as well as increasing the need to access the internet. In 2016, India took the second spot in terms of number of smart phone users, surpassing the US.13 Along the same lines, it is expected that India will have over 500 million mobile internet users in 2017.14 According to a recent report by EY, the number of smartphones in use will grow to 520 million by 2020, while broadband usage will go up to 40%, as compared to 14% in 2016. It is also expected that a large portion of this growth will come from rural areas and smaller cities. This is significant since India is still overwhelmingly rural, and while the urban market for smart phones might be close to saturation, there is tremendous opportunity in tapping the market in rural areas.

The recent demonetization efforts initiated by the government have also given “Digital India” a push, by encouraging a more “cash-less” society. This has resulted in a surge in the usage of digital payments, mainly via the use of smart phones. “E-commerce has taken off in India as well. Not only does e-commerce allow goods and products to reach the smaller cities, it also allows smaller and upcoming manufacturers and entrepreneurs to get a foot in. This encourages innovation, entrepreneurship and gives a leg up to small and medium enterprises,” according to Dutt.

12 “Make in India Policies: Foreign Direct Investment,” Government of India (http://www.makeinindia.com/policy/foreign-direct-investment)

13 “With 220mn users, India is now world’s second-biggest smartphone market,” The Hindu Online, February 3rd, 2016 (http://www.thehindu.com/news/cities/mumbai/business/with-220mn-users-india-is-now-worlds-secondbiggest-smartphone-market/article8186543.ece)

14 “India to have over 500 million mobile internet users by 2017,” The Economic Times Online, Neha Alwadhi, November 21, 2016 (http://eco-nomictimes.indiatimes.com/magazines/panache/india-to-have-over-500-million-mobile-internet-users-by-2017/articleshow/55543589.cms)

15 “Future of Digital Content Consumption in India” EY, January 2016

Rural Users as a Percentage of Total Internet Population15


This increase in demand for technology related services and devices will mean that manufacturing these products in India will allow for a more competitive market strategy. For example, in the recent months, Apple has sought to start manufacturing its devices in India, in the hopes of cracking the smart phone market, which is currently captured by Samsung. The idea being that manufacturing in India would reduce the cost of the iPhone, which partly due to tariffs can be priced out of the reach of many Indians. Being able to manufacture the phone in India, and thereby removing the tariff, would mean that the reduced price would make the phone more competitive.

• Goods and Services Tax:

Another initiative of the government that will impact manufacturing is the new tax regime that will go in effect later this year. The proposed Goods and Services Tax (GST) scheme aims to simplify the way taxes are levied in the country. For manufacturing, the implementation of the new system will reduce the impact on supply chain, by making it smoother and more responsive for goods and services to travel across the country. It will also remove the taxes that are currently levied by each state as a good passes through its borders. There would be one tax from start to end, taking away some of the guess work in terms of final cost of product. “The end result will be increased transparency and that will have a positive impact on the economic system as well,” says Dutt.

Prices of goods might also see a drop, since multiple and cascading taxes would not have to be considered. The overall simplification of the system will aid in attracting Indian and global companies by making it easier to conduct business in India. Furthermore, the GST is expected to have a positive impact on the general economy, according to the IMF. Recent projections state that once the GST goes into effect, creating a single national market, GDP growth could reach 8% in the medium term. The current expected date of implementation is July 1, 2017.16

• Smart Cities and Startup India:

The Smart Cities and Startup India initiatives, like the Digital India initiative, will have a similar kind of impact on manufacturing. The Smart Cities Initiative aims to guide the growth of cities in India by making them more citizen friendly, encouraging walkability, enhancing e-solutions and making government interactions easier for regular citizens. Furthermore, the initiative aims to incorporate smart/technologically savvy solutions to meet the challenges faced by India’s rapidly urbanizing areas. Similarly, “Startup India” aims to encourage innovation and simplify setting up of startup companies in India. The government’s plan includes reducing regulatory burdens on startups, such as those related to labor and environmental laws. These policies all converge together to not only increase demand for technology related products, but by creating more opportunities, employment prospects and raising the buying power of the average Indian, they will eventually also increase the demand for consumer products. The end result being that the demand for goods will need to be met through increased manufacturing, with the hope being that these goods will be produced in India. “These policies take a long-term view of their impact. From the government’s perspective, these initiatives will complement each other,” says Arora.

Manufacturing in India – The Story So FarManufacturing in India is not a new phenomenon. According to a UN report from 2016, India is the 6th biggest manufacturer in the world, up from the previously held position of 9th biggest.17 Similarly, Deloitte’s 2016 Global Manufacturing Competitiveness Index notes that while India is currently in position 11 in terms of being competitive, it is expected to go up to number 5 by 2020.18

16 “GST adoption could raise India’s GDP growth rate to over 8%: IMF,” Livemint.com, Lalit K. Jha, February 22, 2017 (http://www.livemint.com/Politics/gUrpSsKqjjWF1YIkYXJavO/GST-adoption-could-raise-Indias-GDP-growth-rate-to-over-8.html)

17 “India ranked 6th in top 10 largest manufacturers list: UN report,” Hindustan Times Online, April 2, 2016 (http://www.hindustantimes.com/business/india-ranked-6th-in-top-10-largest-manufacturers-list-un-report/story-l15SiTiube3iosINvAKueK.html)

18 “2016 Global Manufacturing Competitiveness Index,” Deloitte Touche Tohmatsu Limited, 2016 (https://www2.deloitte.com/content/dam/De-loitte/us/Documents/manufacturing/us-gmci.pdf)


While the current emphasis has put the sector in the limelight, many manufacturers, Indian as well as multi-national have had manufacturing facilities in the country for some time. Companies such as Cummins and GE have a history of manufacturing in India and both export from India to global regions, something that is not often seen when global organizations manufacture in India. Cummins, which manufactures engines and generators, has 20 plants in India, and 1/6th of their workforce resides in India. Similarly, Pune (in Maharashtra state) serves as a vital part of GE’s global supply chain puzzle.

Other companies such as Abbott (maker of products such as ibuprofen, antacid, and children’s nutritional supplements), target the domestic market by catering to local tastes and needs. This strategy has paid off for Abbott, with India being its third-largest global market.19 With the recent changes to rules that inform FDI into pharmaceuticals, there might be further opportunities for Abbott and other similar companies to increase their share or make an entry into the market.

However, much of the manufacturing in India, thus far, has been low value added, though the country is looking to move increasingly into the higher-end manufacturing segments. In order to make this transition, India has many challenges that it will need to resolve to be on par with global manufacturing hubs. Enhancements will need to be made to the current supply chain in the country. There will need to be increased quality control and agility built into the supply chain system, making it leaner and more effective. Global manufacturing is also several steps ahead of that in India in terms of automation, digitization and data usage. If manufacturers who set up shop in India want to compete on a wider level and export from India, these changes will need to be embraced. “Currently, many organizations who manufacture in India do so with the domestic market in mind. If problems such as quality assurance and supply chain disruptions are resolved, we should see a higher number of facilities being set up,” says Shevade.

There is also a lack of skilled manufacturing labor. The current educational system does not allow for training and mentorship of the kind needed in today’s manufacturing facilities. Increased digitization and automation require skills that are not always taught to those working in or entering into the sector. Additionally, with more and more global manufacturers embracing Industry 4.0, India needs to give a concerted push to improving its manufacturing talent base, if it is to meet its goals. Furthermore, the labor market is unwieldy, and stringent labor laws can make it unattractive to hire manufacturing labor in India. The government is aware of the need to improve the general skill sets of employment seekers. With that aim in mind, in the recent budget, released in early 2017, the government put aside 2.5 billion USD for the Skill India mission, which aims to improve skill sets of the youth in India.20 The initiative’s goal is to impart relevant training to 300 million by 2022.21 According to Shevade, “This is an important part of the government’s strategy. They aim to meet their goals by improving current educational facilities, empowering colleges and universities to be more innovative and giving them more autonomy and flexibility to build curricula.”

The government is also encouraging companies to set up training centers of their own. There are several examples of this already taking place. For example, Airbus will be setting up a “Center for Excellence” with the aim of skill development, and sustaining and growing its supplier base.22 Similarly, Aequs, which manufactures precision aerospace equipment, will be setting up a facility for defense production. In addition to the manufacturing facility bringing jobs and investment into the country, this venture will also be significant from the point of view of transfer of knowledge and skill building.23

19 “Understanding the Rise of Manufacturing in India,” Harvard Business Review, Vijay Govindarajan and Gunjan Bagla, September 18, 2015 (https://hbr.org/2015/09/understanding-the-rise-of-manufacturing-in-india)

20 “To boost Skill India Mission, Govt sets aside Rs 17,000 crore in Budget,” Economic Times Online, February 3, 2017 (http://economictimes.indiatimes.com/news/economy/policy/to-boost-skill-india-mission-govt-sets-aside-rs-17000-crore-in-budget/articleshow/56944089.cms)

21 “India as the world’s skilled labour hub,” The Hindu Business Line Online, Preeti Mehra, June 1, 2016 (http://www.thehindubusinessline.com/opinion/india-as-the-worlds-skilled-labour-hub/article8677846.ece)

22 “Airbus to set up skill centre in Telangana,” The Hindu Business Line Online, Anil Urs, February 15, 2017 (http://www.thehindubusinessline.com/specials/airbus-to-set-up-skill-centre-in-telangana/article9545283.ece)

23 “Aerospace engineering co Aequs to set up ₹500-cr facility in Goa,” The Hindu Business Line Online, Anil Urs, February 17, 2017 (http://www.thehindubusinessline.com/economy/logistics/aerospace-engineering-co-aequs-to-set-up-rs-500cr-facility-for-the-indian-facility-in-goa/arti-cle9549386.ece)

“Since the announcement of Make in India and related initiatives, there has been an influx of companies signing Memorandums of Understanding or starting operations

in the country.”


Since the announcement of the Make in India and related initiatives, there has been an influx of companies signing Memorandums of Understanding (MoU) or starting operations in the country. Some examples include:24

1. Huawei invested 170 million USD to build a R&D center in Bengaluru

2. Hyundai partnered with local company Hindustan Shipyard Limited to manufacture naval ships in India

3. Mercedes Benz doubled its output capacity by opening a second manufacturing facility in Chakan, near Pune city

4. Foxconn, which supplies to Apple, will be investing 5 billion USD into a semi-conductor manufacturing facility

5. Schneider Electric plans to invest 110 million USD over the next five years. The plans include skill development and making its India facilities part of its global supply chain by using it as an export hub.

In addition to companies boosting their investment, countries such as Japan and Germany have shown interest as well. For example, Japan plans to set up a 12 billion USD fund for projects related to Make in India.25 Similarly, several MoUs have been signed between India and Germany to fast-track investment by German companies and make it easier for them to conduct business in India.26

With the anticipated and ongoing increase in manufacturing investment, there should be an uptick seen in the demand for related real estate. Not only will there be a demand for warehouses and manufacturing space, but there will also be an increased demand for office space to house those being employed by the new manufacturing facilities. Similarly, there should be an uptick in demand for retail space in order to showcase the goods being produced. “Location decisions will need to be considered as well, as newer areas of the country become more attractive for business ventures,” according to Shevade.

24 “Story so Far: Make in India – September 2O14 TO October 2O16,” Make in India.com (http://www.makeinindia.com/article/-/v/story-so-far-make-in-india-september-2014-to-october-2016)

25 “Story so Far: Make in India – September 2O14 TO October 2O16,” Make in India.com (http://www.makeinindia.com/article/-/v/story-so-far-make-in-india-september-2014-to-october-2016)

26 “Merkel puts her weight behind Modi’s ‘Make in India’ drive,” DW.com, Murali Krishnan, October 5, 2015 (http://www.dw.com/en/merkel-puts-her-weight-behind-modis-make-in-india-drive/a-18761965)

27 “Indian Manufacturing & Logistics: On a Roller Coaster Ride!” JLL, January 2017 (http://www.jll.co.in/india/en-gb/Research/ManufacturingLo-gistics.pdf?ffaa5735-3603-4349-b919-fa2c6352bae3)

Year on Year Warehouse Stock for Grade A and B (2014-2018)27


ConclusionIndia still has many challenges that will need to be met, before it can compete with China on the global manufacturing stage. Arora concludes, “The key is going to be implementation of these many policies. Investment and MoUs are pouring in, but now is the time for action on the part of the Indian government and market players. If the polices are able to be pushed through in their entirety, the future looks bright.”

Thank you to the following leaders for their input:

Surabhi Arora

Sanjay Dutt

Yogesh Shevade