A. Background
The manufacturing sector of India is one of the key sectors of the Indian economy. This sector currently contributes 16-17% towards India’s GDP and provides employment to around 12% of the country’s workforce[1]. By 2022, the Government of India aims to achieve 25% GDP share and create 100 million new jobs in the manufacturing sector of India[2].
In the past 5 years, the Government of India has introduced a series of reforms to boost the development of the manufacturing sector of India. Continued policy support, high demand potential, government support on the improvement of infrastructure, relaxations in relation to FDI, industry specific policies, incentives and subsidies have all contributed towards an increased number of foreign investors investing in the manufacturing sector of India. In this article, we shall discuss the key factors which contribute towards the growth of the manufacturing sector of India.
B. Growth Factors
I.Active Demand: By 2030, India’s middle class is expected to have the second largest share in global consumption at 17%[3]. The overall large population of India along with the rapidly increasing middle class creates a huge market for the consumption of products manufactured in India.
II. Government Initiatives: In the past 5 years, the government of India has introduced several intiatives such as “Make in India”, “National Manufacturing Policy” and “Skill India” with the intent of making India the global manufacturing hub. Among the aforementioned initiatives, the “Make in India” intiative has been the most significant. Several policy reforms such as the historic tax reform of “Goods and Services Tax”, the digitisation drive, in which, the filing of taxes & the processes related to the incorporation of a company have been moved online and last but not least, the landmark Insolvency and Bankruptcy Code 2016, were all introduced under the ‘Make in India’ initiative.
III. Foreign Direct Investment (FDI) Policy: In October 2020, Tata Group announced plans to invest US$ 673.20 million to set up an Apple phone component plant in Hosur, Tamil Nadu. Furthermore, five international electronics manufacturing applications from companies such as Foxconn, Wistron, Pegatron, Samsung and Rising Star have been approved by the Government of India to set up production worth US$ 122.5 Billion over the next five years. These investments have been the outcome of the FDI Policy of India under which 100% FDI under the automatic route (i.e. no prior government approval required) is permitted for setting up manufacturing units under most sectors.
IV.Tax Advantages: In September 2019, the government of India slashed the base corporate tax rate from 25 percent to 15 percent for new manufacturing firms incorporated after October 1st, 2019 and commencing operations before March 31st, 2023. This change in tax policy makes India one of the most competitive investment destinations when compared with other Asian countries.
V.Post Pandemic Measures: The spread of the pandemic in China, had a serious impact on the supply chain of many multinational companies which has led to many companies evaluating their dependence on China, in particular, their supply chain and manufacturing strategy. Cheap labour costs along with a highly skilled working population may lead to many multinational companies evaluating India as an alternate manufacturing destination. To make India the next manufacturing hub, the government of India has passed several policies to boost investment in MSME’s, contract manufacturing, electronic manufacturing and defence manufacturing sectors. Further, the government has chosen 10 sectors as focus areas for promoting manufacturing which include electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles.
C.Conclusion
One of the largest economies of the world with a huge domestic market, abundant resources, a young and skilled labour force makes India one of the most attractive manufacturing hubs in the world. Issues in relation to land acquistion, developing infrastructure and logistics could represent some challenges which foreign investors may face within the Indian markets. However, with the policy reforms being introduced by the government in the recent times, we are hopeful that these challenges will be addressed and the ease of doing business in India will improve significantly making India a land of unlimited opportunities.
We at D’ Andrea and Partners Legal Counsel, have a team of experts to help you establish business operations in India. Do get in touch with us at info@dandreapartners.com for any questions or assistance.
[1]https://www.cii.in/sectors.aspx?enc=prvePUj2bdMtgTmvPwvisYH+5EnGjyGXO9hLECvTuNsfVm32+poFSr33jmZ/rN+5
[2] https://www.ibef.org/download/Manufacturing-November-2020.pdf
[3] https://www.ibef.org/download/Manufacturing-November-2020.pdf
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