The COVID-19 pandemic has exposed the fragility of the world’s supply chains for medicines and medical products, food, energy, vehicles, telecom equipment, electronics, and countless other goods. Certain companies have begun to reconfigure their sourcing and manufacturing footprints for greater reliability and resilience, setting up more locations so that they don’t have to depend on just a few geographies. But some nations are not yet ready to take full advantage of these shifts.
India stands out as one such country: a potential manufacturing powerhouse that has yet to realize its promise. From fiscal year 2006 to fiscal year 2012, India’s manufacturing-sector GDP grew by an average of 9.5 percent per year. Then, over the next six years, growth declined to 7.4 percent. In fiscal year 2020, manufacturing generated 17.4 percent of India’s GDP, little more than the 15.3 percent it had contributed in 2000. (By comparison, Vietnam’s manufacturing sector more than doubled its share of GDP during the same interval.) And in the past 13 years, India’s manufacturing-sector share of employment increased by just one percentage point, compared with a five-point increase for the services sector.
As our colleagues argue in the McKinsey Global Institute report India’s turning point: An economic agenda to spur growth and jobs, developing globally competitive manufacturing hubs represents one of the biggest opportunities for India to spur economic growth and job creation this decade. This article offers a closer look at how to do that. We identify 11 manufacturing value chains with strong potential to operate in international markets, power growth, and provide long-term employment and skill pathways for millions. Their potential comes from several factors. First, these value chains are well positioned to capitalize on India’s advantages in raw materials, manufacturing skill, and entrepreneurship. Second, they can tap into four market opportunities: export growth, import localization, domestic demand, and contract manufacturing.
Lastly, the 11 value chains stand to benefit from a fresh, focused approach to industrial policy. This approach would not entail the sort of far-reaching bureaucratic reforms that can lower input costs and improve the ease of doing business across many sectors. (Such reforms could be valuable, but their slow pace to date has resulted in feeble gains for manufacturers.) Rather, the new reforms would specifically catalyze the growth of India’s manufacturing value chains by helping them lift their productivity, secure know-how and technology, and gain access to capital. With these reforms, and complementary actions by manufacturing companies, we estimate that the 11 value chains could more than double their GDP contribution to $500 billion in seven years, while powering extensive job creation at a time when the COVID-19 crisis has pushed millions below the poverty line.
A transformative opportunity: 11 manufacturing value chains, $300 billion of GDP potential
While some companies and sectors in India’s manufacturing industry have delivered strong returns on invested capital (ROIC), most have not. According to our analysis, nearly 700 of the top 1,000 manufacturers produced returns that were less than their cost of capital in 2018, thereby destroying value. By contrast, the sectors that generated healthier returns saw increases in invested capital during the four years from 2016 to 2019 (Exhibit 1).
Several conditions help explain why Indian manufacturers tend to create limited value. Some have to do with the costs of infrastructure and key inputs. Poor logistics causes delays and raises inventory costs; high prices for power and credit inflate operating expenses. Other conditions are inherent to the value chains. The small, fragmented companies that make up some value chains cannot operate productively, let alone at peak efficiency; cannot innovate quickly enough to keep up with competitors; and cannot command price premiums because they lack strong brands.At the same time, many of India’s manufacturing value chains enjoy important advantages that could help power them to rapid growth. India’s natural resources (for example, iron ore, bauxite, high solar insolation, and cotton) and low-cost labor are a boon to makers of basic metals, textiles and apparel, renewable energy, and chemical products. The country’s large numbers of well-trained workers lend strength to skill-intensive value chains such as pharmaceutical formulations, capital goods, and automotive components. And many manufacturing value chains in India operate in close proximity to strong domestic markets. The makers of fast-selling technology products, for example, enjoy ready access to millions of Indian consumers.
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SOURCE: McKinsey & Company