The Manufacturing Sector: Growth Story of India
THE MANUFACTURING SECTOR GROWTH STORY OF INDIA
The Manufacturing Sector Growth Story of India
1
TABLE OF CONTENTS
4
1. Introduction ............................................................................................................................
5
2. Evolution of Manufacturing: from liberalization to ‘Make in India’ ...................
10
3. The emergence of China+1 diversification strategy ...............................................
12
4. Alternative locations within APAC ................................................................................
18
5. Comparison of India’s Manufacturing Sector ecosystem .....................................
21
6. India’s Boisterous Target - Manufacturing @25% GDP by 2025 .......................
24
7. Impact of PLI on capacity addition and manufacturing outlook ......................
28
8. Fostering better trade relations with the world ......................................................
30
9. Excerpts from C&W’s global manufacturing report, 2022 ..................................
32
10. Real Estate benefits with rising activity in manufacturing sector .................
36
11. Policies are in-place for existing challenges .............................................................
38
12. Conclusions ..........................................................................................................................
Note: All USD to INR conversion is done at 1$ = 82.27 INR
No force on earth can stop an idea whose time has come Victor Hugo
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2 . EVOLUTION OF MANUFACTURING: FROM LIBERALIZATION TO ‘MAKE IN INDIA’
1 .
INTRODUCTION
The contribution of manufacturing sector to India’s GDP has remained relatively low for an extended period, hovering around 15-16%. Recognizing the need to diversify its economic landscape and create more employment opportunities, the Indian government has taken proactive measures to revitalize the manufacturing sector. Key initiatives such as the “Make in India” campaign and the “Production-Linked Incentive (PLI)” scheme have been introduced to foster a favourable environment for both domestic and foreign manufacturers. The importance of prioritizing the growth of the manufacturing sector in India extends beyond economic diversification. It holds great significance in terms of job creation, especially for the country’s burgeoning youth population. By nurturing the manufacturing sector and providing targeted training programs, India can absorb a significant portion of its semi-skilled labour force and offer them meaningful employment opportunities. This not only addresses the challenge of potential unemployment but also harnesses the demographic dividend, enabling sustainable and inclusive growth. India’s services sector currently constitutes a major portion of the country’s GDP and has been a significant contributor to its economic growth. However, the dominance of this sector, primarily driven by the IT BPM industry, has posed challenges for India’s labour force, particularly its growing population of young individuals with semi-skilled competencies. Without sufficient opportunities in the manufacturing sector, there is a risk of unemployment and underutilization of this vital resource. India’s significance as an alternativemanufacturing destination has become even more pronounced in recent times, given the global reliance on China and the need to adopt a China+1 diversification strategy. The COVID-19 pandemic and geopolitical tensions have exposed the risks associated with overreliance on a single country for manufacturing. As a result, many advanced economies are actively seeking alternative locations to mitigate these risks and diversify their supply chains. India, with its vast market potential, favourable policies, and competitive advantages, has emerged as a compelling option for global manufacturers. Moreover, the growth of the manufacturing sector also presents unique opportunities for the real estate industry. As the manufacturing sector expands, there is an increased demand for industrial and logistics spaces, creating prospects for real estate development, particularly in peripheral areas surrounding major cities. This symbiotic relationship between manufacturing growth and real estate development underscores the potential for mutual progress and economic advancement. The recent upswing in the industrial and logistics segment within the Indian real estate space serves as a precursor to what lies ahead. At Cushman & Wakefield, we are closely watching these developments and look forward to witnessing the growth narrative unfold. We hope this research paper provides our readers with an insightful exploration of the manufacturing growth story in India.
What started-off as an effort to arrest factories moving-out to more competitive locations globally, India is today attracting global manufacturers to set-up their base in the country basis availability of skilled labor and pro-active government support.
EVOLUTION OF MANUFACTURING POLICIES IN INDIA
PRE-1990 PRE-LIBERALIZATION • Bureaucratic control on production, trade, and investments in manufacturing • Highly regulated market • License on quantitymade. FDI inflow formanufacturing sectors restricted to 40% to certain large and heavy industries • Exports were not encouraged; Focus was on meeting domestic demand
1991-2014 POST LIBERALIZATION • Limited focus on growth of manufacturing. Polices largely focused on growth of services sector • Reduced restriction on industries • Except for certain critical areas like defence, FDI limits were gradually increased to almost 100% • Policies focused to sustain manufacturing and reduce dependency on imports 2014 - TILL DATE - MAKE IN INDIA • Higher focus on manufacturing and increasing its growth (to raise GDP share from average 17% currently to 25% by 2025) • Manufacturing GDP grew at 5% CAGR during 2015-21 to USD 0.44 Trn • Increased focus on improving ease of doing business and attract more FDI inflows (Ease of doing business ranking for India improved from 142 rank in 2015 to 63 rank in 2020) • Focus on improving export volume of many goods (Merchandise export)
• 2016 Exports – USD 267,951 Mn (INR 22,048 Bn)* • 2021 Exports – USD 395,425 Mn (INR 32,496 Bn)
*Source – WTO Merchandise Exports Database
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MANUFACTURING POLICIES IN INDIA: KEY MILESTONE
2014 MAKE IN INDIA • Embodied the concept of NMP • More sectors like defence were opened for FDI • Investor Facilitation Cell (IFC) was formed for investors
2020 PLI SCHEMES • An outlay of INR 1.97 Lakh crores across 14 key sectors • Potential to generate an additional production of INR 30 lakh crore by 2027
2014
1991 LIBERALIZATION • Licensing was abolished • FERA was repealed and FDI limits were increased under automatic approval
1973 FERA ACT • Restricted the entry of foreign companies to core sectors • Equity share limited to 40% in most of the sectors
2020
1991
2011
1973
2011 NATIONAL MANUFACTURING POLICY (NMP) • Share of manufacturing sector in total GDP to 25% by 2022 • Boostingmanufacturingproduction through National Investment and Manufacturing Zones (NIMZs)
25% OF GDP CONTRIBUTION India - Prominent Global Manufacturing Hub
2000
1951
2000 SEZ POLICY • Boost exports and attract substantial investment • Tax exemptions and incentives to support the sector • Y2K bug resulted in a boost in service sector of India
1951 INDUSTRIAL LICENSING POLICY • Regulated entry and exit of the industries • License to open new private factory was mandatory
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In the post-liberalization world, Indian economy was swayed by growth in the services sector whereas the growth of manufacturing & agriculture sectors largely remained muted
INDIA GROSS VALUE ADDED – CURRENT US$ TN
3.50
9%
10%
9% 7%
7%
6%
5% 6%
3.50
1991 - 2014 LIBERALIZATION
2014 - TILL DATE
1991 – 2014
2014 - 2021
3.0
3.00
GDP (CAGR*)
Service Sector (CAGR)
Manufacturing Sector (CAGR)
Agriculture Sector (CAGR)
2.50
2.50
*CAGR - Compound Annual Growth Rate
2.00
2.00
1.50
1.50
1.0
1.00
During the liberalization era post 1991, growth of the service sector took-off in a big way. During the 14 years from 1991-2014, the services sector grew at 10% CAGR as against manufacturing and agriculture sector growing at 7-8% during the same period. Policies and incentives were largely geared towards the growth of information technology, banking, and other services sector, with limited focus on a targeted growth for the manufacturing sector. Consequently, the services sector continued to grow at a higher pace compared to all other sectors and the overall economy even during the 2014-2021 period, when government began focusing on growth of the manufacturing sector for semi-skilled job creation. The manufacturing and agriculture sector growth has been a laggard relative to the overall economic growth since the post liberalization era. Slower growth of the manufacturing sector can be attributed to various factors – inadequate infrastructure, limited investments in R&D, archaic labor laws, labor productivity issues etc. Similarly, the agriculture sector has been plagued by problems such as inadequate R&D on productivity, fragmented land holdings, lack of modernization etc.
0.50
0.50
- 0.00
2000
2003
2006 2009
1991
1994 1997
2012
2015
2018 2021
GDP (current US$ Trn)
Manufacturing, value added (current US$ Trn)
Services, value added (current US$ Trn)
Agriculture*, value added (current US$ Trn)
*Agriculture sector includes agriculture, forestry and fishing
*Source - World Bank Database-2021
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CHINA ENJOYED HEALTHY TRADE SURPLUS GLOBALLY (USD BN)
THE EMERGENCE OF CHINA+1 DIVERSIFICATION STRATEGY 3 .
562
European Union
285
Trade tensions, rising labor cost and ad-hoc policymaking duringCovid-19 compels global manufacturers to look for diversifying theirmanufacturing base During the 1990s, many US and European manufacturers started to shift their production base to China, taking advantage of its low-cost manufacturing resources and access to a large domestic consumer market. Consequently, China moved swiftly from cornering an average 9% in 2004 share of the global manufacturing share to nearly 30% share in 2021 thereby becoming a dominant force in global manufacturing share. 1
277
582
USA
178
404
567
Southeast Asia
408
RISING SHARE OF CHINA IN GLOBAL MANUFACTURING OUTPUT
159
18,000
35%
173
30%
Japan
184
30%
28%
15,000
27% 27%
-12
26% 25% 26%
In global trade, owing to large manufacturing bases been set up in China, the country’s exports swelled and it enjoyed a large trade surplus with many advanced as well as emerging nations. Very few nations such as Australia have a trade surplus with China, largely owing to them supplying raw materials such as iron ore, liquefied natural gas, nickel etc. to the world’s largest exporting nation. The resulting outmigration of semi-skilled jobs to China was also turning out to be a political debate across many countries. For instance, one of the focus areas of the-then (2015-16) US Presidential contender Donald Trump was to introduce import tariffs on China and protect local manufacturing jobs. Gradually, countries such as India, Vietnam, Bangladesh, Mexico, Thailand, Philippines, and Malaysia have been explored as viable locations for diversifying global manufacturing base as opposed to having a high concentration in China.
24% 25%
25%
22%
12,000
79
20%
20%
18%
142
Australia
17%
9,000
-63
14%
15%
12%
6,000
82
9% 11%
9%
10%
UK
22
3,000
5%
60
54
0% $16,047
0
$7,261
$7,771
$8,403
$9,451
$10,237
$9,341
$10,578
$11.817
$12,065
$12,283
$12,715
$12,329
$12,389
$13,239
$14,1711
$14,011
$13,570
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Canada
42
11
USD Billion World Manufacturing Output Value
% Share of China in Total
115
*Source - Macrotrends Database
81
Singapore
34
China’s one-child policy that was announced in 1980 led to far-reaching consequences in its labor market. For instance, between 1980-96, the working age population (aged 15-64) growth was at 2.2% annualized. Post 1996, when the policy’s impact started to show, this growth rate reduced to 1.5% from 1996-2006, and thereafter the growth rate reduced further to 0.5% during 2006-2016 period. While the policy was called-off by the Chinese government in 2015, the labor market continued to see its impact for a long time. This will likely result into upward pressure on labor wages, which is currently at USD 8 per hour. During the period from 2010 21, Chinese labor cost index grew by 38%, thereby diluting the advantageous cost arbitrage it enjoyed over several other nations. 2
118
India
17
101
China Exports
China Imports
China Trade Balance
Source - General Administrative of Customs of People’s Republic of China-2022
1 Macrotrends Database | 2 Global data – Labor cost index, China
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4 .
ALTERNATIVE LOCATIONS WITHIN APAC
Locations in South-East Asia that have emerged as viable alternatives to China
CHINA
JAPAN
INDIA
TAIWAN
THAILAND
VIETNAM
PHILIPPINES
INDONESIA
China
Emerging South-East Asia countries in manufacturing space
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FACTORS THAT ARE EXPECTED TO IMPROVE INDIA’S ATTRACTIVENESS COMPARED TO REGIONAL ALTERNATIVES By 2031, India will add 97 million people (22 percent share) to the world’s working population 12 . With second largest labor workforce (among its South-Asian peers) currently, India can become a hub of skilled manufacturing workforce that is also cost competitive.
ALTERNATIVE LOCATIONS WITHIN APAC
• VIETNAM - Vietnam has successfully managed to raise its manufacturing share in GDP fromunder 17% in 2010 to above 25% as of 2022. In its master plan 2030, the country has planned many infrastructure developments across road, rail, air and sea transport. The World Bank’s Ease of Doing Business rank for Vietnam improved from 78 in 2015 to 70 as of the last reported year 2020. With a proactive stance by government, in 2022, the manufacturing sector accounted for 60.6% share of total FDI inflow of USD 15.8 billion. Electronics and Automobiles were key sectors in FDI investments 3 . According to Brooking Institute 4 , Vietnam is expected to be the 18 th largest global consumer market by 2030, with close to 56 million consumers. • THAILAND - Contribution of the manufacturing sector in country’s GDP has been hovering in a healthy range of 26-30% for almost a decade. Ease of Doing business rank for Thailand improved from 26 in 2015 to 21 in 2020. In 2022, Electronic & Electrical appliance sector and automotive sectors were the two large sectors attracting 20% of the total manufacturing FDI (or close to USD 3.6 billion out of a total USD 18 billion FDI Inflow) 5 . According to Brooking Institute, Thailand is poised to become the 17 th largest consumer market by 2030, with more than 60 million 6 consumers. • MALAYSIA - The GDP contribution of manufacturing sector in Malaysia was at 23% in 2021. This share remained in the range of 21-23% over the last decade. 7 The Ease of Doing Business rank for Malaysia has improved from 18 in 2015 to 12 in 2020. In the year 2021, 61.4% of the total USD 10.7 billion FDI flows in the country was directed at the manufacturing sector, particularly towards electrical & electronics, and transport equipment category 8 . In 2022 (January to September), Manufacturing FDI recorded ~USD 14 billion 9 . According to Brooking Institute, Malaysia is expected to be the 30 th largest consumer market by 2030. • INDIA - Contribution of the manufacturing sector in India’s economy remains relatively under-penetrated at close to 15.8% in 2021, thereby stagnating in the range of 13-17% in over two decades. However, India’s Ease of Doing Business (EODB) rank has steadily improved from 143 in 2015 to 63 as of 2020. In FY-22, the manufacturing sector attracted close to USD 21.34 billion (INR 1,756 Bn) of investment. 10 The policy push to uplift the sector through Production-Linked Incentive (PLI) scheme is likely to increase up FDI inflows into manufacturing in the coming years. As per the Brooking Institute 11 , India is estimated to currently have the second largest consumer base in the world, with close to 473 million consumers.
LABOUR FORCE AND MANUFACTURING WAGES IN SOUTH ASIA AND CHINA (2022)
900
793.8
8
800
7
700
7.1
6
600
4.7
5
500
471.3
4
400
2.6
3
300
Labour Force (mn)
Manufacturing Wage ($/hr)
1.6
1.5
2
200
139.2
1
100
56.2
43.8
39.1
1
16.3
0.8
0
0
China
India
Indonesia
Vietnam
Philippines
Thailand
Malaysia
Labour Force (mn)
Manufacturing Wage ($/hr)
Source: Morgan Stanley analysis, 2022 13
IMPROVED RANKING IN EASE OF DOING BUSINESS In the World Bank’s Ease of Doing Business Report, India had significantly improved its rank from 143 in 2015 to 63 rank as of latest survey available in 2020. This was the biggest jump witnessed among comparable nations, indicating a proactive approach taken by the Indian government to make business climate favorable for global manufacturers.
EODB RANK 2015
EODB RANK 2020
DIFF (+/-)
143
63
+80
India
114
73
+41
Indonesia
3 Ministry of Planning and Investment, Vietnam - FDI Investments Update 2022 4 Brooking Analysis: Top 30 consumer markets of this decade-2021 5 PR Newswire - FDI Investments in Thailand 6 McKinsey 2021 analysis
78
70
+8
Vietnam
95
95
-
Philippines
7 World Bank Data - GDP Contribution of Manufacturing Sector in Malaysia 8 Malaysian Investment Development Authority - Article on FDI inflows in Malaysia 9 Malaysian Investment Development Authority - Article on Investments in Malaysia 10 Press Information Bureau-Ministry of Commerce and Industry-dated Jul 2022 - Trends on FDI inflows in India 11 China and India: Future of Global Consumer Market: Brookings
26
21
+5
Thailand
18
12
+6
Malaysia
90
31
+59
China
12 Morgan Stanley Analysis of data from Euromonitor, the World Bank, International Labor Organization (ILO) and United Nations Industrial Development Organization (UNIDO) | 13 Business Standard article dated Nov-2022
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INDIA’S FDI INFLOWS DOMINANT IN THE SERVICES SECTOR 14 Sectoral Share of FDI (INR Crore)
134,080
208,564
127,789
76,783
63,961
66,621
41,254
146,981
54,656
74,645
8,438
24,216
99,252
118,728
91,683
87,731
106,784
70,465
14,357
15,253
11,205
7,407
11,438
90,740
121,223
36,751
33,004
84,449
39,899
48,218
60,751
70,367 140,985 150,465 198,143 153,112 178,996 152,792 289,704 161,767
59,593
59,069 14,390 41,906
39,741
14,390
2008 2009 2010 201 1
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022**
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020 2021
2022 **
Service Sector
Manufacturing Sector
Other*
Source: DPIIT Statistics
Foreign Direct Investments (FDI) plays an important role in bringing-in the crucial capital for value-creation in any sector. According to the World investment Report 2022 of United Nations Conference on Trade and Development (UNCTAD) 15 , India is counted among the top (ranked 7) FDI destinations globally. Having said that, much of this healthy FDI inflows goes into fueling growth within the services sector. A likely reason for the higher share of services sector could be because doing business in the services sector in India is less complicated than doing business in the manufacturing space. During the period of 2011-14 the share of FDI for manufacturing averaged around 60% of total FDI inflows, largely coinciding with the announcement of National Manufacturing Policy in 2011. In the subsequent years, the exuberance somewhat stabilized, and the share of manufacturing averaged around 28% during 2015-2022. 16 Within the manufacturing sector, FDI has been concentrated in industries such as computer, electronics hardware, automotive, and machinery.
14 * Others sector includes agriculture, utility, logistics, etc. | ** The FDI Inflow of 2022 is till December 2022 | 15 UNCTAD – World Investment Report 2022 16 Press Information Bureau – FDI Inflow in India
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5 .
COMPARISON OF INDIA’S MANUFACTURING SECTOR ECOSYSTEM
India’s manufacturing sector compared to alternative destinations in APAC
INDICATOR
INDIA
CHINA
VIETNAM
MALAYSIA
INDONESIA
THAILAND
SINGAPORE
PHILIPPINES
63
Ease of Doing Business (2020) Rank 17
31
70
12
73
21
2
95
38
Logistics Performance Index Rank (2023) 18
19
43
26
61
34
1
43
16
FTA: Signed & In effect (Number) - Nov 2022 19
21
15
18
16
15
27
10
435
Export Volume (2022) USD Bn 20
3,593
371
352
291
287
515
74
2.33%
% Share in Global Trade 2022 21
12.49%
1.45%
1.28%
1.05%
1.17%
1.96%
0.44%
8.63
Workforce employed in manufacturing (Million, 2020) 22
27.28
1.38
0.38
2.55
0.77
0.03
0.55
In terms of the export volume, the export-driven economy of China is clearly dominant with a USD 3,363 billion, almost 10x value of its peers in South Asia. Singapore and India take the second lead with USD 457 billion and 395 billion (INR 32,496 Bn), respectively. In terms of Ease of Doing Business and Logistics Performance Index, Singapore takes the lead with its strong governance, conducive business environment and strong connectivity infrastructure. India scores relatively low, behind countries like Malaysia, Thailand, and China. In terms of active Free Trade Agreements (FTA), Singapore and China have maximum number of FTAs and other South Asian countries have similar number of agreements in place.
India’s strength lies in its large availability of skilled workforce, a significant improvement demonstrated in the Ease of Doing Business rank as well as Logistics Performance indices, and a reasonably healthy number of free trade agreements (FTAs).
17 Ease of Doing Business Report World Bank (2020) | 19 Free Trade Agreements Database (adb.org) | 20 World Trade Organization Database on Merchandize Trade (Export Volume) | 21 World Trade Organization Database- Exports and Imports share- Merchandize | 22 International Labor Organization - Manufacturing sector employment data 18 World Bank Database for Logistics Performance Index Rank |
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6 .
INDIA’S BOISTEROUS TARGET - MANUFACTURING @25% GDP BY 2025
India has laid out a target of ramping-up manufacturing sector’s share in GDP to 25% by 2025. Through policies such as the Make in India, which embodies erstwhile National Manufacturing Policy of 2011, the government intends to create favorable conditions that can foster public private partnerships, increase global competitiveness, create specialized manufacturing zones/hubs, enhance skillsets to make the workforce skilled in desired areas of manufacturing, etc. To further support the manufacturing sector of the country, government has also announced initiatives such as Self-Reliant India Mission and PLI Schemes . SELF-RELIANT INDIA MISSION In response to COVID-19 pandemic, the Indian government launched Atmanirbhar Bharat initiative in 2020. It focuses to achieve self-sufficiency in areas of national importance such as defence, renewable power, pharmaceutical, chemicals and semiconductors: SELF-SUSTAINABILITY IN DEFENCE - Identifying the requirement of large-scale modernization of armed forces, the Indian government has set policy actions to boost indigenous design and manufacturing of defence equipment in the country. • Revision made in Defence Acquisition Procedure (DAP-2020) to obtain critical capital goods for defence from indigenous market. • In 2020, increased FDI limit in defence sector from previous 74% to 100% (with government approval) wherever it is likely to provide access to modern technology. • Created a list of 2851 items of Defence Public Sector Undertakings (DPSUs) which would be prohibited from being imported. • Launch of an indigenisation portal like ‘SRIJAN Defence’ to promote Make in India together with the MSME sector. SELF-SUSTAINABILITY IN RENEWABLE POWER - In 26 th United Nations Climate Conference of Parties (COP) , India has committed to achieve 50% of installed electrical capacity (close to 500 GW) from non-fossil source by 2030. India is also targeting to become self-reliant in energy sector by 2047. To achieve this target, the government has pursued attracting investments in renewable energy sector i.e., solar, wind turbines, battery manufacturing etc. Under the PLI scheme, 100% FDI is allowed in renewable energy sector (generation and distribution) through the automatic route. SELF-SUSTAINABILITY IN PHARMACEUTICAL SECTOR - In FY 2019-20, bulk drug imports accounted for INR 40,000 Cr (USD 4.86 Bn), out of which many were critical ingredients for essential medicines. In the wake of COVID 19, a need emerged for creation of indigenous capacity for such critical compounds. The union ministry introduced four schemes to make India self-reliant in the production of 53 critical Active Pharmaceutical Ingredients (APIs) or Key Starting Materials (KSMs), and medical devices. SELF-SUSTAINABILITY IN SEMICONDUCTORS - Globaly a large amount of shortage in availability of semiconductor chipset was witnessed owing to COVID-19 and rise in demand for computing equipment. It had a negative impact on sectors such as automobile, defence, and consumer appliances. It is estimated that India’s own semiconductor requirement will reach USD 80 billion (INR 6581 Bn) by 2026 and USD 110 billion (INR 9,049 Bn) by 2030 from USD 24 billion (INR 1974 Bn) in 2022. Hence a focus on creating an eco-system to indigenously cater to this growing demand. SELF-SUSTAINABILITY IN CHEMICAL SECTOR - India is the sixth largest chemical producing country in the world and third largest producer in Asia. However, the country ranks 14th in exports from chemical industry excluding pharmaceuticals. The Indian chemicals market is projected to reach $850-1000 Bn (INR 69,929 Bn – 82,270 Bn) by 2040. With this potential as well as growing emphasis on China+1 strategy, India could grow as a hub for chemical manufacturing and exports. Considering this, the government has identified chemical sector under self-reliant India Mission and is working on initiatives like PLI, custom duty rationalization and more. 23
23 Economic Times- Chemical manufacturing in India
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PLI PUSH FOR MANUFACTURING To support the domestic manufacturing and generate employment opportunities, government of India announced PLI schemes under 14 key sectors with a total budgetary outlay of INR 1.97 lakh crores (USD 24 Bn). The PLI schemes were expected to achieve a minimum production of over USD 500 billion (INR 41,135 Bn) in 5 years from the year 2021. Considering this target, 13 schemes were announced with clear production targets, timelines, and budgetary outlays. While the PLI schemes across these 14 sectors received varied responses, the below table cites progress made so far in some sectors 24 -
Out of the proposed PLI schemes, sectors including chemical, pharma, food products, and aviation have recorded a positive response as well growth in investment, employment, and production. More than 600 firms have been selected in 2 years across 14 sectors to achieve the desired targets. 34 On the other hand, certain PLI schemes were not able to fetch desired results in terms of target production and investments. Government has identified the challenges and is working on the revision of these schemes in terms of incentives and tenure to address these challenges. The results of these modifications would be evident in the coming years. 35
Scheme/Launch Date/Budget Outlay
Sector Background
PLI Objective/Target
Current Status
PLI Scheme for Advanced Chemistry Cell (ACC) Battery Storage Announced in May 2021 Budgetary outlay of INR 18,100 Crores (USD 2.2 Bn)
Manufacturing capacity of 50 Giga Watt Hour (GWh) of ACC for Enhancing India’s Manufacturing Capabilities. Additionally, private players are expected to create battery manufacturing capacity of ~95 GWh 26
India’s annual demand for ACC batteries is projected to rise between 104 gigawatt-hours (GWh) and 260 GWh by 2030 across multiple sectors from existing domestic demand of 2.7 GWh as of Sept 2022 25
This scheme was oversubscribed by 2.6 times (130 GWh). Finally, 4 companies were selected for incentives under PLI Scheme for Advanced Chemistry Cell (ACC) Battery Storage 27 28
Chemical Pharmaceuticals Aviation Food Products
PLI 1.0 and PLI 2.0 - List of approved applicants is out PLI Scheme for Promoting Domestic Manufacturing of Medical Devices - A total of 26 projects have been approved, with a total committed investment of INR. 1206 Cr. Out of this, INR. 714 Cr has been realised to date. A total of 14 projects have been commissioned and domestic production of high-end medical devices has begun. 30 A provisional list of 23 PLI beneficiaries was released on 6th July 2022. The shortlisted companies witnessed an increase in combined annual sales turnover from Rs 88 crore (USD 10.69 Mn) in FY 2020-21 to Rs 319 crore (USD 38.77 Mn) in FY 2021-22 32
PLI Scheme for Bulk Drugs (PLI 1.0) - Announced on July 2020 with Budget outlay of INR 6940 Cr. (USD 0.84 Bn) PLI Scheme for Bulk Drugs (PLI 2.0) - Announced on Mar 2021 with Budget outlay of INR 15000 Cr. (USD 1.82 Bn) PLI Scheme for Promoting Domestic Manufacturing of Medical Devices with a Budget Outlay of INR 400 Cr. (USD 50 Mn)
India has around 80-85% import dependency on APIs and medical devices from other countries, majorly China. India imports APIs worth INR 35,000 crore (USD 4.25 Bn) annually from China which is dominant in the manufacturing of APIs 29
The main objective is to boost domestic production of 41 select critical bulk drugs and reduce import dependency
Through PLI, the annual sales turnover of the drone manufacturing industry is expected to grow from INR 60 crore (USD 7.29 Mn) in 2020-21 to over INR 900 crore (USD 109 Mn) in FY 2023-24
PLI Schemes for Drones and Drone components - Announced on 30/9/2021 with budget outlay of 120 crores (USD 0.014 Bn)
The drone services industry is expected to grow to over INR 30,000 crore (USD 3.64 Bn) and over five lakh jobs by 2024 31
To increase processing capacity of processed food output of Rs 33,494 crore (USD 4.07 Bn) and create employment for nearly 2.5 lakh persons by the year 2026-27
India’s food processing sector is one of the largest in the world which has recorded a production of 315.7 million tons in 2021-22
PLI for food processing industry - Announced on 26 May 2021 with a budget of INR 10,900 Cr. (USD 1.32 Bn)
182 applications have been approved as of Dec 2022 33
24 PIB – PLI schemes in India | 25 IBEF – Chemical Industry in India | 26 PIB – PLI scheme for ACC battery storage | 27 Invest India – PLI schemes in India | 28 PIB – PLI scheme for ACC battery storage | 29 Financial Express – Article on Indian Pharma sector and its dependency on China
30 Annual Report by Department of Pharmaceutical, India 2020-21 | 31 PIB – PLI scheme features for Drone and Drone Components | 32 PIB – PLI Scheme for Drone and Drone components | 33 PIB – Achievement of MoFPI, India (Jan to Dec 2022) | 34 Business Standard – Challenges of PLI schemes | 35 Financial Express – Article on PLI scheme for IT Hardware
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INDIA’S EXPORTS SURGE IN THE POST-PLI ERA
IMPACT OF PLI ON CAPACITY ADDITION AND MANUFACTURING OUTLOOK 7 .
800K
714,042
613,052
Given a massive public outlay made over the years to spruce up manufacturing capabilities in the country, India is currently witnessing a surge in capacity additions in electricity generation, a crucial input for commercial establishments, including manufacturing. Within that, the renewable power sector is gaining greater momentum as its share in total electricity generation has been consistently rising in the last nine years. Renewable power generation contributes nearly 12% of total power generation in the country as of FY22, significantly rising from merely a 5% share nine years ago. Renewable energy is critical for global manufacturers looking to set up establishments in India and also lower carbon emissions costs of maintenance and fuel.
600K
514,079
474,709
465,581
450,958
394,436
422,004
384,357
400K
330,078
313,361
303,526
291,808
275,852
INDIA: RAMPING-UP CAPACITIES IN RENEWABLE POWER
11%
200K
1,600,000
1,400,000
8%
PLI SCHEME ANNOUNCED
1,200,000
0K
1,000,000
5%
2017-18
2018-19
2019-20
2020-21
2021-22
2022-23
2016-17
800,000
Import
Export
*Values in USD Mil
600,000
2%
400,000
SELECT SECTORS ENJOY SURGE IN EXPORTS, ATTRIBUTABLE TO PLI
200,000
Growth of exports in 2022 over 2019 level across broad segments
2017-18
2016-17
2015-16
2018-19
2013-14
2014-15
2021-22
2020-21
2019-20
100%
Electricity Generation (GWh)
Renewable % share
80%
Source: National Power Portal (GOI)
60%
The success of the Production Linked Incentive (PLI) scheme is already visible through increased exports in select sectors such as Electronics, Chemicals and Agro products. These sectors have experienced heightened trade activity as exports have surged during the latest annual period 2022 when compared to the corresponding period in the pre-covid year of 2019. The Indian government is contemplating introducing the PLI scheme for more sectors to further augment exports across a spectrum of manufacturing segments.
40%
20%
0%
FMCG
Mining
Others
Chemicals
Electronics
Grand Total
Agro & Fisheries
Heavy Machinery
Healthcare, Pharma
Source: Ministry of Commerce & Industries
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The Reserve Bank of India’s manufacturing capacity utilization is an important parameter to ascertain the period for capacity augmentation by manufacturers. Typically, a capacity utilization of 75 or above indicates reasonably healthy demand for domestic manufacturing firms. Any signal towards a further rise in capacity utilization is a trigger for initiating capital spending for capacity expansion by manufacturers. During the pandemic years, the manufacturing capacity utilization rates in India had fallen below 70 and there was hardly any incentive for further capacity expansion. However, this number has already reached pre-pandemic levels as of 2022 with latest readings suggesting it could soon reach/breach 75 levels.
An ICRA (a Moody’s Investors company) report of Nov-2022 on PLI for manufacturing revealed that the share of this sector in overall capital expenditure, or capacity building, has surged from an average of 24% in the pre-PLI years (FY2015-19 period) to an average of 44% in the post-PLI period (FY2021-22), with the last fiscal reading for FY22 recorded at 49%.
MANUFACTURING SHARE IN INDIA’S TOTAL CAPEX
(4-quarter rolling average) MANUFACTURING CAPACITY UTILISATION IN INDIA
60%
49%
50%
80.0
75.0
40%
70.0
Post-PLI spike in Manufacturing CAPEX
30%
65.0
Period between two major lockdowns
20%
60.0
10%
55.0
PLI SCHEME INTRODUCED
50.0
0%
2014-15
2015-16 2016-17
2017-18
2018-19 2019-20 2020-21
2021-22
Q2 - FY17
Q2 - FY21
Q2 - FY15
Q2 - FY18
Q2 - FY16
Q2 - FY19
Q4 - FY17
Q2 - FY14
Q4 - FY21
Q4 - FY15
Q4 - FY18
Q4 - FY16
Q4 - FY19
Q4 - FY14
Q2 - FY22
Q2 - FY23
Q4 - FY22
Q2 - FY20
Q4 - FY20
Source: ICRA PLI report press release, Nov-22
RBI OBICUS survey, April-2023
PLI is now poised for rapid on-the-ground execution, with a large share of the capex already approved and major spending set to occur over FY24-FY26. As per the ICRA report, the deployment of capex may kick-off in a big way over this fiscal year 2023-24, with investments likely to cross the INR one lakh crore threshold and may touch 1.7 lakh crore in FY26. The Government is also contemplating launching PLI schemes for a few more sectors (containers, electrolysers, power transmission equipment, etc.) to ensure manufacturing CAPEX continues to remain elevated beyond FY26.
Interestingly, as per a FICCI March-23 survey of 400 Indian manufacturing firms, suggests many sub segments within manufacturing such as Petrochemicals, Fertilizers, Textiles, Auto, Electronics etc. have already breached the average capacity utilization levels and have even reached a tight capacity phase where additional CAPEX is crucial to meet future demand. The survey report suggests that ~47% of respondents have reported plans for making investments and expansions in the coming six months or so to meet the pressing need for capacity augmentation, with 32% of respondents even expressing their intention to hire additional workforce in the coming months.
Expected capex (Rs trillion) EXPECTED RISE IN CAPEX DRIVEN BY PLI SCHEMES
REMARK
MANUFACTURNG SUB-SEGMENT Paper Products Petrochemicals and Fertilisers Textile Machinery Capital Goods Auto and Auto components Electronics Cement Miscellaneous Textiles Chemicals and Pharma Metals and Metal Products Machine Tools
AVERAGE CAPACITY UTILISATION (CU)
95% 95% 85% 81% 80% 79% 75% 74% 73% 67% 67% 65%
1.5-1.7
TIGHT CAPACITIES
1.2-1.4
0.9-1.1
ABOVE AVERAGE CU
0.2-0.4
MODERATE CU
FY23
FY24
FY25
FY26
Source: FICCI Quarterly Survey on Indian Manufacturing Sector, Mar-2023
Source: ICRA PLI report press release, Nov-22
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FOSTERING BETTER TRADE RELATIONS WITH THE WORLD 8 .
Being the fifth largest economy in the world today, India’s contribution of below 3.0% to the world’s merchandise trade only exhibits a vast potential to grow. Through favorable policy environment by the government, and a global initiative towards diversification of manufacturing base from China, we have reasons to believe that this share is likely to rise in the coming years.
The Indian government has been pro-active in its trade relations engagement with important trading partners globally. As per the World Trade Organization, India is currently engaged in negotiations for Free Trade Agreement (FTA) with 16 foreign entities, which is the highest number of negotiations compared with the alternative manufacturing destinations considered here. When these negotiations are closed and FTA signed, India will likely be the second most connected trade partner globally, after Singapore, amongst comparable countries. FTAs are proven and an important tool for economies to promote trade with other countries globally.
INDIA’S CONTRIBUTION TO WORLD’S MERCHANDIZE TRADE
2.50%
INDIA’S BILATERAL TRADE (IN MERCHANDISE) ARRANGEMENTS IN THE LAST 10 YEARS
2.16%
2.13%
2.12%
Free trade agreement status by countries (as of nov-22)
2.06%
2.11%
1.94% 2.10%
2.09%
2.00%
2.06%
40
1.99%
1.88%
1.83%
35
1.58% 1.67%
30
1.50%
25
1.23% 1.34%
20
1.14%
0.94%
1.00%
15
0.80%
0.72%
0.86%
10
0.74%
5
0.50%
0
India
China
Vietnam
Malaysia
Indonesia
Thailand
Singapore
Phillipines
SEZ Policy 2005
Make in India - 2014
PLI Scheme 2021
0.00%
Signed and in effect
Framework agreement signed
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Signed but not yet in effect
Negotiations launched
India’s contribution in Global Merchandize Trade
Source: World Trade Organization Database on Merchandize Trades
Source: Asia Regional Integration Centre, ADB
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9 .
EXCERPTS FROM C&W’S GLOBAL MANUFACTURING REPORT, 2022
India’s manufacturing attractiveness on the rise; conditions have improved a long way
SCENARIO
DESCRIPTION
WEIGHTINGS
BASELINE
The baseline scenario gives equal importance to a country’s operating conditions and cost operating conditions and cost competitiveness
40%
20%
40%
Conditions
Risk
Cost
TOP QUARTILE
SECOND QUARTILE
THIRD QUARTILE
FOURTH QUARTILE
Singapore Morocco Finland Japan United Kingdom Greece Brazil Sweden Tunisia Argentina Australia Italy
China India Indonesia
Portugal Sri Lanka Bulgaria Korea, Republic of Philippines Turkey Canada Peru
Germany France Austria Norway Netherlands Belgium Denmark Ireland Switzerland
Malaysia Thailand Poland Vietnam Czech Republic Colombia United States
Romania Lithuania Spain Mexico
Hungary Slovakia
In its most recent Manufacturing risk index report 2022, Cushman & Wakefield assessed the suitability of 45 different countries for global manufacturers to set-up their base, and India featured in the top-most quartile. The index uses parameters to broadly analyze countries on the three important parameters - business conditions, risk, and costs. As part of the market’s transition to higher-order manufacturing, industrial production in China has remained buoyant owing to newly emerging industries such as “new energy” and “new material” products, including charging piles, wind turbines and photovoltaic cells and the production of “new energy” vehicles which has benefited from positive government support.
This transition, together with ongoing economic expansion of the Asia Pacific region and the commensurate demand for goods, will continue to support China’s manufacturing sector. India, along with few countries in Southeast Asia, score high as they have advantages such as low-cost of labor and property, pro-active government policies, proximity to China (helping facilitate the China+1 diversification), along with other benefits. Particularly for India, it offers a vast and rapidly growing consumer market that few manufacturing companies would ignore.
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IN MANUFACTURING SECTOR 10 .
SUB SECTOR WISE LEASING WITHIN E&M SECTOR (2017-22)
REAL ESTATE BENEFITS WITH RISING ACTIVITY
1%
22%
14%
13%
10% 7%
3% 2%
28%
Activities in the commercial office real estate market often mirrors the growth trend seen across multiple sectors present in the country. Over the last 5-6 years, gross lease volume (GLV) has suggested the rising activity within the Engineering & Manufacturing (E&M) space, particularly since the PLI scheme was introduced. Occupiers within the E&M space have pursued active leasing of office space across the top-8 cities in India. As of the most recent two years (2021-22), the E&M sector contributed a significant 15-18% share in the overall leasing volume, which is the highest leasing done by E&M in history. During 2017-18 period, this share used to be not more than 6% on average.
Electronic Equipment
Chip Manufacturing
Automobile
Chemical
Precision Engineering
FMCG
Medical Devices
Pharmaceuticals
Others
PAN India E&M Share of GLV (msf) E&M’S RISING SHARE IN OFFICE LEASES ACROSS TOP 8 CITIES
Source: C&W Research
20.0%
80
72
18%
18.0%
69
70
16.0%
60
14.0%
52
15%
49
49
47
50
12.0%
10.0%
40
CITY WISE LEASING SHARE BY E&M SECTOR (2017-22)
10%
8.0%
30
8%
6.0%
6%
20
6%
12% 8% 7% 3% 1%
4.0%
19%
25%
25%
10
2.0%
0
0.0%
2017
2018
2019
2020
2021
2022
GLV (msf)
E&M share
Source: C&W Research
Bengaluru
Delhi NCR
Mumbai
Hyderabad
Pune
Chennai
Kolkata
Ahmedabad
In last five years, chip manufacturing & electronic equipment took almost 34% share, becoming the largest two E&M sub-sectors driving demand. Almost 70% of overall E&M sector’s office demand were concentrated in three major cities of Bengaluru, Delhi NCR, and Mumbai.
Source: C&W Research
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E&M’s share in total seat absorbed in flex offices across top-8 cities E&M OCCUPIERS’ SPACE CONSUMPTION IN FLEX OFFICES
120,000
10.0%
9%
100,000
7%
80,000
60,000
3%
40,000
20,000
105,967
85,234
37,759
0
0.0%
2020
2021
2022
Total Seats
E&M share
Source: C&W Research
There has been a significant increase in the total number of seats take-up by occupiers from flex space operators in the post-Covid period. Number of seats take-up has risen from 37,759 in 2020 to 85,234 in 2021, and further to 105,967 in 2020 across the top-8 real estate markets of India. E&M has been an important contributor to this rise in demand for flex seats, with the sector now accounting for ~9% of overall seats take-up, compared with merely 3% in 2020. E&M occupiers are increasingly realising the need to provide well-managed office spaces to retain and attract talent, while also keeping their real estate CAPEX low.
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