ISSUES OUTLOOK

by Royce Lowe

India on the Up and Up

India, the world’s most populous nation, has roughly 800 million working-age people and will add some 200 million more over the next thirty years. Manufacturing presently employs between 50 and 60 million people. A conservative projection based on output to 2047 sees manufacturing with the potential to create 85 million more jobs. Of late, India has seen improvements in foreign trade and exchange controls, infrastructure and technological readiness. Market opportunities are there, including a large, growing domestic market. The business environment in India has seen improvements across most parameters. The manufacturing sector is in development through lots of young labor, and the working-age population is forecast to be up by some 100 million in the period to 2030, to surpass 1 billion. (China’s will fall by 40 million to under 950 million.) India’s median age, at around 28 years, is some ten years below China’s.

There is lots of low-end manufacturing in India; hence low labor costs. Female participation in the Indian labor force is very low, hence its labor force is smaller than China’s. There are low levels of literacy and technical skills in India. Secondary education levels are inadequate. Education is missing years. There are skill gaps. Programs are in place to improve skills, but these will take time to bear fruit. There will be higher training costs.

India’s infrastructure, although improved, still leaves much to be desired. But more cargo is going through India’s ports, and its ports are more efficient. The railway network has hardly expanded since 2000 despite investment. The national highway network, on the other hand, has expanded rapidly in recent years, and has more than doubled since 2000. Land acquisition for infrastructure construction, and for construction of fabrication shops is difficult, but it is expected the government will make it more accessible. Infrastructure development that is underway will greatly reduce manufacturing costs. As regarding the ports, Mumbai, India’s largest and the 35th largest globally, handles only a tenth of Shanghai’s - the world’s largest.

Electricity supply, inland waterways and intermodal freight transfer all need significant improvement.

The Indian government has come up with a Production Linked Incentive, or PLI scheme, that is a form of performance-linked incentive to give companies incentives on incremental sales from products manufactured in domestic units. It is aimed at boosting the manufacturing sector and reducing imports. A further aim of the scheme is to attract Foreign Direct Investment. The scheme applies to several industries, including automotive, aviation, chemicals, metals and mining, renewable energy and white goods. Each industry receives an approved financial outlay from the government over 3-5 years.

Progress is being made in the development of industrial corridors. But the ongoing infrastructure improvement, regardless of the effort being put into it, will be very long. During the past decade India has turned from being anti-free trade agreement (FTA) to seeing the benefits. The initial problem was a backlash by small local businesses which thought they might be “swallowed up” by them. The countries of South-east Asia are more involved in such similar agreements than is India.

Foreign Direct Investment to India has increased from next to nothing in 2005 to over $40 billion in 2022, with services, software and construction being the most attractive sectors. India has fierce competition in this respect from South-east Asian countries, particularly from Indonesia. India is the world’s second largest producer of crude steel. There are two giants in this sector, namely Tata and JSW. Tata is also the owner of Air India, the company that recently signed a huge order with Boeing.

The biggest challenges facing India in its quest to become a major manufacturing influence, would seem to be its infrastructure, the acquisition of skills by its young workforce, and the attraction of Foreign Direct Investment. It should be noted here that India’s manufacturing industry performance in March was significantly superior to that of all other major manufacturing nations.

MAY 2023