Five Investments India is Making to Become China's "Plus One" in Manufacturing
Apple announced recently that they will create manufacturing capacity in India to produce 25% of the world’s iPhones from there. Apple is acting on a trend with other multinationals to reduce reliance on China as their primary manufacturing source. The COVID-19 pandemic and geopolitical events such as the Russia-Ukraine war have vividly illustrated the fragility of the world’s supply chain.
India is one country that’s been working hard to become China’s Plus One and improve its attractiveness as a manufacturing hub. Currently, manufacturing contributes 17% of the GDP. The government’s goal is to expand manufacturing to 25% of GDP by 2025. Below are five investments India is making to attract foreign investment and build domestic manufacturing capacity.
Investment #1: Production Linked Incentives (PLI)
The PLI schemes provide economic incentives to foreign companies, like Apple, to set up manufacturing facilities in India. It also provides incentives to domestic Indian companies to set up or expand manufacturing capacity to increase employment and reduce reliance on imports to meet domestic demand. These schemes are targeted at 14 key sectors including electronics, pharmaceutical drugs, and medical devices. In exchange for investing in plants, machinery, and R&D, the government is providing various incentives for up to five years.
Investment #2: Special Economic Zones
India has approximately 270 Special Economic Zones (SEZ) to attract Foreign Direct Investment (FDI). These SEZs give favorable tax treatment to companies setting up manufacturing sites. Often, these zones are targeted at specific industries to develop manufacturing clusters. As an example, Pune attracts about 20% of India’s FDI with a concentration in automobiles and durable goods. Pune also serves as an engineering R&D hub for companies such as Tata Motors, Volkswagen, and Visteon.
Investment #3: Road Infrastructure
India is focused on improving road infrastructure with agencies such as the Ministry of Road Transport and Highways (MoRTH) and the National Highways Authority of India (NHAI). India’s roads support over 60% of freight transportation in the country. In FY22, India completed over 6,200 miles (10,000 kilometers) of roads, up significantly from previous years. Much of that has been built under the Toll-Operate-Transfer model where India builds the highways and then monetizes them by selling the right to operate the roads and collect tolls. Companies like Canada’s Brookfield Asset Management are providing the capital for this monetization process. The Indian government has even gone digital with the deployment of a Project Management and Data Lake cloud-based software used to manage the bid and execution process of all contracts.
Investment #4: Shipping Port Infrastructure
The Indian maritime sector accounts for 95% of export-import trade by volume. Like roads, India has been actively working to build port capacity through the use of Foreign Direct Investment. The Maritime Vision 2030 initiatives seeks to attract foreign investment to build and operate ports under long-term contracts. A central component of the Maritime Vision 2030 is the creation of four mega-port clusters. These will come in the states of Gujarat, Maharashtra, Tamil Nadu, and West Bengal-Odisha. Key features will include port automation, seamless movement of cargo, and paperless transactions to create standard processes and provide access to real-time information for port management.
Investment #5: Human Capital Development
According to a 2020 World Bank study, India’s Human Capital Index places it 116th out of 174 countries. The index measures a variety of factors including projected life expectancy and quality of education. India’s population skews younger, with 65% of the population under 35. As part of the challenge to develop skills to compete, India has a partnership with the World Bank to improve education quality. Additionally, private companies run programs to further improve skills after completion of education at the university level.
Conclusion
India is not alone in its desire to take manufacturing from China. Other Asian countries like Vietnam, Thailand, and Malaysia are also ramping up to compete. However, India is making serious commitments to increase its global competitiveness and become a central part of the world’s manufacturing sector.