India Rising: Will it be the next factory of the World?

To persuade investments from abroad and improve conditions for the development of domestic manufacturing, the Indian government has issued a series of policies supportive of manufacturing in recent years, including the most recent and significant of them all, the PLI scheme. A strategy launched in 2020, the PLI scheme introduced a landscape where foreign companies are being induced to move their arms to India, hence augmenting India’s position in the global manufacturing chain. The budget for the PLI program starts at 1.97 trillion Indian rupees, which is about $27 billion, and reportedly is intended to be rolled out over several years, as indicated by government data. The policy’s core aim is to bolster India’s performance to compete in global manufacturing, along with the forces of technological advancement and industrial updating.

The CII has put up a detailed report underlined with its economy is set to become globally a key player, registering at least $100 billion extra by the time it will get to 2025, due to the PLI initiative. It will neither only create about 7 million jobs, i.e., a big boost to the Indian job market. But, as of now, the positive impact of the policy is already showing results: Foreign companies’ interests in investing in India are rapidly rising. The UNCTAD states that foreign direct investments into India reached an estimated $84.5 billion in 2022, up by 25 percent on the previous year. The UNCTAD states that India had a remarkable leap in foreign investment in 2022 amounting to $85 billion, which is indicative of a 25 percent leap from the last year, underlining India’s growing appeal as the investment-driven economy. The dramatic rise in FDI indicates that the country is achieving an increasingly better position within the global economy, fully backed by pro-business policies, a large consumer market, and rising digital readiness. Such investment should assume a decisive role in sustaining India’s economic growth momentum and attracting further direct foreign investment soon. This amazing leap indeed demonstrates the substantial attraction of the Indian manufacturing sector in the eyes of many foreign investors and strongly exemplifies the substantive role and achievement of the PLI policy in giving an active push to the development of the manufacturing sector.

Though these policies are positively perceived, many issues in development-infrastructure and labor markets must still be achieved before India can become a global manufacturing hub. While India’s recent policies to promote its manufacturing sector have so far proven encouraging, it faces other considerable challenges that may prevent it from fully realizing its aspirations as a global manufacturing hub. Other key obstacles are infrastructural deficiencies and poor transportation and energy supply, which cripple operational efficiency and competitiveness of manufacturing. The labor market experiences challenges related to skills imbalance: there are several sectors in which certain activities are conducted exclusively by under-trained workers. Until such bottlenecks are cleared, India’s aspirations will remain hampered.

India’s development of infrastructure, while improved in recent years, is certainly less developed and inhibits the expansion of manufacturing further on. In the past, India has shown promising strides in developing infrastructure with the improvement of key areas like transportation, energy, and telecommunications. Protective, however, overall development of infrastructure coming in way of certain late maturity level by and large assures proper global standardization. Open doors for manufacturing are certainly wide-ranging examples. Because lack of reliable and efficient infrastructure limits productivity and increases the cost of doing business, these factors all inhibit the complete potential for growth in manufacturing and related areas and, therefore, the capabilities of India to remain a competitive global player. Thus, it is imperative to increase investment in infrastructure to substantially help enhance sustainable economic growth and improve manufacturing capabilities further. According to the World Bank, India’s proportion of its GDP that is invested in infrastructure is relatively low by global standards, lagging China’s figures quite considerably. Transportation, logistics, and power, quite a few visible shortcomings remain with regard to implementation in India. This type of inefficiency has been reflected in both high logistics costs and the movement of supply chains, hampering the productivity of firms. According to the National Economic Council of India, logistics costs in India constitute roughly 13 per cent of its GDP, while those in China are about 8 per cent. Such a huge gap emphasizes the weakness, inefficiency, and problems associated with India’s logistics infrastructure, which very much impacts the economy and competitiveness. Reducing logistics costs is vital, as it moves India towards greater trade efficiency, deeper supply chain management, and a more buoyant economy. Addressing this issue through strategic investments in infrastructure, technology, and regulatory reforms could help bring India’s logistics costs closer to global standards, thereby enhancing prosperity through stronger economic growth. The high logistics cost has put pressure on firms to operate efficiently and remain competitive in the global market. Power supply is also unstable in various parts of India, and regular power outages are detrimental to manufacturing. As per the report by the Ministry of Power, India still finds it hard to generate sufficient capacity to serve the ever-increasing demand, thus forcing businesses to incur higher production costs in many areas. Groundwork must be laid for greater investments in infrastructure development, especially transportation networks and power supply, to enhance support for manufacturing. India could re-energize its manufacturing base if it were to direct efforts toward strengthening its infrastructure base via a significant improvement in transporting systems, with special reference to the upgraded construction of roads and railways, ports, and airports. Another area of infrastructure enhancement is for the power supply to guarantee continuous flow to support industrial production. Strengthening these infrastructure components would provide a firm foundation for manufacturing and overall economic growth, while attracting foreign investment and improving competitiveness in the global market. While India’s labor market does have its advantages, it has its shortcomings as well. The sheer size of the young population ensures that a large supply of labor is available to the manufacturing sector. However, there is a long way to go in closing the gap between skill levels and education quality within the labor force if India’s labor market were to be expected to cater to high-end manufacturing. Within India’s manufacturing sector, considerable advances aside, a huge gap exists in terms of the skills and educational quality of the labor force. In its context, the gap becomes crucial because high-end manufacturing relies heavily on advanced technical skills and specialized knowledge to meet industrial demands. It, therefore, makes it a formidable challenge for the labor market to completely match the requirements of the high-tech, exacting manufacturing. Addressing the gap would require a massive increase in investment into education, vocational training, and up-skilling initiatives to create a sufficiently large workforce capable of thriving in an advanced manufacturing setting. Government data indicates that about a third of India’s labor force lack secondary education, thereby impairing their chances of getting into highly skilled and well-paying jobs, forcing them into low-skilled jobs. Of that labor force, government data point to about a third lacking the benefit of secondary schooling: this is a large educational attainment gap. Workers within this segment encounter difficulties gaining access to such employment, often resulting in them being driven into low-skilled positions. It was found that, even after secondary education, limited growth or advancement opportunities still occupied positions, which solidified the skills mismatch in the country. It became imperative for the economy to address this issue so that productivity can genuinely enhance to prepare the individuals to face the challenges of a global economy by becoming more competitive every day. The skill mismatch resulted in a scarcity of talent for manufacturing-based jobs, impeding upgrades in industrialization and technological renovation. Besides, Indian labor law systems pose certain difficulties for enterprises in being managed. The Indian labor market is highly rigid with respect to recruitment, dismissal, and employment condition. Normally, enterprises face huge legal costs and management headaches. Moreover, India has a very strong union system, putting companies in a very disadvantageous position, especially in negotiating with the unions. Therefore, India still has a long way to go for labor market reform, and quality upgradation and market flexibility would be key for the future growth of its manufacturing industry.

While it has been, since time immemorial, a key global manufacturing block, in rising labor costs, increasing stringiest environmental policies, and overseeing the segment transfer to automation in parts, several China-based companies, prompted by low-cost environments elsewhere in the world, have recently begun to reconsider their business models. Traditionally, China has been the central base of global manufacturing, principally favored due to its huge labor force and cost-effective production capabilities. However, in the recent past, several factors have led to gradual shifts in this combination. Rising labor costs, attributable to rapid economic growth and a more demanding workforce, are strapping manufacturers back to the drawing board. Stricter environmental regulations mean most companies have to adapt sustainable practices, which tend to drive up operational costs. The increased integration of automation technology across various manufacturing sectors has reduced labor demands, thus further inducing considerations by some manufacturers to move to lower-cost destinations with unlimited labor and operational expenditures. These evolving factors have ushered in a slew of foreign manufacturers seeking to explore other options regarding their manufacturing capabilities. India, for instance, has emerged as an attractive alternative, with its low labor costs, enormous market, and evolving industrial fabric. According to UNCTAD, India’s participation in global manufacturing has been slowly rising, particularly within low-level manufacturing, letting it build up into a major base of investment for several international corporations. According to the UNCTAD, India’s share of global manufacturing has been steadily increasing in recent years, especially at the bottom end of the manufacturing spectrum, where India has emerged as an important player. India’s competitive labor costs, large skilled workforce, and expanding infrastructure have made it an attractive destination for multinational corporations looking to diversify their manufacturing operations. As a result, India has evolved into a new investment hotspot, attracting FDI and strategic partners to support its continued industrial expansion.

Compared to China, India possesses unique advantages in low-end manufacturing, particularly textiles and electronic apparatus, and some labor-intensive industries. This is evidenced by India’s ability to attract increasing foreign capital inflows based on lower production costs. However, it is important to understand that India lags far behind China when it comes to hi-tech manufacturing and vast infrastructural development. The historical and technological accoutrements accumulated by China in these fields have afforded it a cushy seat in the world arena. This said, economic backwards and forwards between India and China are not purely antagonistic, with the countries showing complementarity in such fields as high-tech industries, IT, and services, etc. Also, the economic relationship between the two countries runs somewhat deeper than the confrontation model. They do complement each other in various advanced fields with their competitive and parallel growths. Ongoing instances of cooperation manifested in the IT industries, etc. are an indication of the ever-increasing cooperation, in which either country, when complemented by another country’s differentials, has the potential to tap new opportunities via win-win cooperation. The two guys are a few paths away from each other. India is stronger in IT, and China in hardware manufacturing. The prospect for these countries is to support open cooperation.

To conclude, India, a rising force in global manufacturing, has the potential to transition into a global factory. With the implementation of the PLI and the supporting policies, India attracted very large amounts of foreign capital and promoted the unending growth of the manufacturing sector. Full foreign ownership of manufacturing is now possible, given that policies emanated from the PLI scheme have created a conducive atmosphere for global companies to invest in India’s manufacturing ecosystem. Not only did these efforts create jobs, but they also strengthened the position of India within the global supply chain, thus helping the nation grow economically. The government has also focused on areas including infrastructure development, investments, business enablement, and innovation that have kept the manufacturing sector momentum forward. However, infrastructure bottlenecks, structural issues in the labor market, and labor law rigidities are other significant bottlenecks to manufacturing growth in India. Concerns should now turn towards the infrastructure build-up, improving the quality of its workforce, and looking hotly at labor-law changes if India intends to displace China as the global manufacturing hub. Thus, as India emerges out of its difficulties and becomes better reformed and developed, it has the potential to be the next factory of the world, furthering the country’s standing in the global economy. Such a change is bound to not only help India improve its economic standing but also allow it to establish itself worldwide as a major hub for manufacturing and export. This growth in its economic reforms and developmental strides is arguably bound to usher in India’s greater prominence in the global economy by providing ample opportunities for growth and investment.

By Qingning Zhao