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Manufacturing for the world – A bold Budget adds to the momentum

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Beset by problems of low productivity and the availability of cheaper import substitutes, the manufacturing sector’s share in India’s GDP has remained range bound for the past 20 years. Though India has moved up in the World Trade Organisation‘s rankings of leading exporters in world merchandise trade, its share in global exports has been hovering around 1.5 per cent mark since 2010. Despite this apparent stagnancy, the years following the launch of Make in India 1.0 have seen some notable developments. The program, whose core objective has been to bolster manufacturing capabilities by promoting exports, has been a vital reason behind the commendable growth in India’s electronics manufacturing sector over the past five years. Notably, the launch of the Phased Manufacturing Program (PMP) for the electronics industry has led to the growth in exports of telecom handsets from USD 0.3 billion in FY15 to USD 3.8 billion in FY20. However, the lack of a convincing rationale for the selection of sectors under the aegis of Make in India, absence of significant changes to import duties and inadequate production-linked incentives have resulted in the limited success of the program.

The Atmanirbhar Bharat Abhiyan, estimated at 15 per cent of the GDP as of November 2020, is an opportunity to kickstart Make in India 2.0. The program addresses some of the inadequacies of its predecessor and focuses on incentivising investment through fiscal incentives, while developing select manufacturing ecosystems by curbing imports. Given the progression from a ‘one-size-fits-all’ approach for 25 sectors under Make in India 1.0 to a clear focus on select sectors under Make in India 2.0, the latter, if executed as intended, could be the impetus India needs to develop a competitive manufacturing ecosystem.

Seizing the opportunity

The growing emphasis on supply chain realignment by companies globally and the critical need for India to reduce its import dependence on a single market, are the key triggers behind the launch of ‘Atmanirbhar Bharat Abhiyan’.

Supply chain re-alignment at a global scale

The government, having introduced several significant reforms last year, realised it was an opportune time to attract companies for whom supply-chain relocation has become a top priority in the wake of COVID-19. Firms from countries including the U.S., Japan and South Korea, have already expressed interest in shifting their production facilities to India. The government’s investment-driven policy measures along with corporate tax cuts are likely to further underpin India’s attractiveness as a manufacturing hub.

Over-reliance on imports from dominant geographies

From raw materials to critical components, the pandemic exposed the reliance of the country’s key sectors on a few markets for fulfilling their sourcing requirements. While global supply chains were swiftly dismantled as one country after another went into lockdown, efforts toward bolstering domestic manufacturing gained momentum. With the introduction of the USD26 billion Production Linked Incentive scheme, the government has undertaken important measures to further reduce India’s import dependency.

A bold budget adds to the momentum

Coming in the backdrop of an extremely turbulent 2020, Budget 2021 was a growth-oriented budget that displayed the government’s clear intent of building safe infrastructure and shoring up the economy battered by the pandemic. For the manufacturing sector, there were several announcements that should bolster India’s manufacturing capabilities over the medium term including the introduction of PMP for solar cells/panels, setting up of mega textile parks and rationalization of customs duty. Investments in Research & Development (R&D) is another area that will play a pivotal role in aiding the growth of the manufacturing sector. Allocation of USD 6.9 billion to the National Research Foundation for five years is likely to strengthen the country’s research ecosystem. Lastly, the expansion of NIP, further development of Dedicated Freight Corridor and increased CAPEX for railways are likely to improve connectivity, bring down logistics cost and boost domestic supply chains.

While ‘Make in India 1.0’ laid the foundation, ‘Make in India 2.0’ is likely to hasten the manufacturing transition

While Make in India 1.0 was instrumental in furthering the evolution of manufacturing in India, Make in India 2.0 is expected to increase its momentum. However, India is not the only country stepping up its capabilities in domestic manufacturing to attract global investors. The country competes with equally lucrative manufacturing destinations in the region, some of which fare better than India on important parameters such as land and labour laws. For instance, India’s complex land acquisition laws have hit investor confidence in the past. While the formation of a land bank of 4.8 lakh hectare is a step in the right direction, more such reforms would be needed to improve the attractiveness of the manufacturing sector. R&D is another area in which India has been lagging developing economies. India’s R&D spend, at 0.6 percent of GDP, is one of the lowest among emerging markets.

While the pandemic has spurred interest in India’s domestic manufacturing ecosystem, the journey has just begun. Providing easier access to land, boosting R&D and legal infrastructure, and further investment in re-skilling efforts are just a few of the prerequisites for India to achieve its goal of becoming a global manufacturing hub.

The author is COO- India Global and Leader – Supply Chain Re-alignment, KPMG in India. Views are personal.

(For front-line insights on how to position India on the global manufacturing map tune in to ET India Inc Boardroom from 22-26 February and hear from industry leaders. Register now on www.etboardroom.com.)

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