The Manufacturing sector in India

CIN: U65991MH1994PLC080811

The manufacturing industry in India has gone through various phases of developmentover time. Since independence, the Indian manufacturing sector has travelled from theinitial phase of building the foundation in 1950’- early 1960’s, to the license–permit Rajin the period of 1965–1980, to a phase of liberalization of 1990’s.

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India’s growth in the manufacturing sector over the last decade has been good. In 2013,it was ranked the 4th most competitive manufacturing nation in Deloitte’s global indexfor 38 nations. The economy experienced significant expansion during the period 2006-2011, achieving a 5 year CAGR of 7.8%.

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Manufacturing sector contributes about 15% of India’s GDP and 50% to the country’sexports. The Manufacturing sector employed 58 million people (about 12% of theworkforce) in 2008. By 2012, it was estimated that this sector will employ a further12–13 million out of nearly 89 million additional people who will enter the workforce.Every job created in manufacturing has a multiplier effect, creating 2–3 jobs in theservices sector. In a country like India, where employment generation is one of the keypolicy issues, this may make this sector a critical sector to achieve inclusiveness in growth

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The story so far...

The contribution of India’s manufacturingsector has remained stagnant in thepast few years. The slowing external anddomestic demand has caused themanufacturing sector to move at a slowerpace than the overall economy. The charton the right shows the contribution ofmanufacturing in GDP. As seen, thecontribution from this sector has hit adecadal low inspite of the GDP

increasing over the previous year with the contribution from the sector on the decline.

GDP at Factor Cost Mnfg Growth rate(RHS)12

10

8

6

4

2

0

15

10

5

0-0.7

-5

05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14

4.7

1.1

4.5

Source: Bloomberg

CIN: U65991MH1994PLC080811

Why we think the Manufacturing sector is the next big thing?

With the government’s focus tilted heavily towards growth and development, we feel themanufacturing sector will see improved growth over the next few years. Recently, thegovt. launched the “Make in India” campaign which focuses exclusively on developingIndia as a manufacturing hub. The key growth drivers for the sector will be:

Decrease in Labour Cost: The cost of labour in India is cheaper than in many othercountries, thus providing a competitive advantage to the country’s manufacturingsector

Rise in export and domestic orders: Manufacturing activities have gradually risendue to new export orders and increased domestic demand recently

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Increasing competitiveness against China: The Indian Manufacturing sector hasgained competitiveness against their chinese counterparts due to currency fluctuationsand soaring operational cost which augur well for growth opportunities in theIndian manufacturing sector

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Ease in tax reforms: The Interim Indian Budget 2014-15 proposed changes in indirecttaxes which include factory gate tax to be reduced to 10% from 12% on some capitalgoods and consumer durables as well as excise duty cut on small cars, two wheelersand commercial vehicles to 8% from 12%

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Source : Bloomberg and BSLAMC research