Will India’s lofty manufacturing ambitions bear fruit?

This report comes from this week's CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary on the emerging powerhouse and the big players behind its meteoric rise. Like what you see? You can subscribe here.

India has long been considered China is the backstage of the world, and China in Asia is the global factory power.

In the 10 years since its launch “Made in India,“ The government has introduced various support measures such as the Production Linked Incentive Scheme, which supports local and foreign companies to establish themselves in India. Expenditure amounted to INR 1.97 trillion (USD 24 billion), PLI is leveraging 14 industries Based on factors such as scope to reduce imports, promote exports and create employment.

From technology center to iPhone maker

To witness India's progress from tech hub to manufacturer, just head north from India's Silicon Valley in Bangalore.

About 65 kilometers (40 miles) northeast of Kolar district is a Tata Group-owned factory that produces iPhones for the tech giant apple. Tata Group becomes first Indian company to produce iPhone after acquiring Taiwanese company WistronOperations last October.

Another iPhone factory will soon be located in Doddaballapura, 45 km from Bengaluru. Operated by Foxconn, it is expected to produce about 20 million iPhones per year once operations begin.

14% of iPhones are made in India, which is currently the largest producer of smartphones after China. Indian Prime Minister Modi said. Apple plans to increase this ratio to 24% to 25% between 2027 and 2028.

Foxconn is among a growing number of contract manufacturers setting up factories in India to tap into its pool of workers looking for employment. The company currently has more than 30 factories in India, employing about 40,000 workers.

Like the Tata Group, other Indian companies are jumping on the bandwagon. For example, Dixon Technologies It is one of India's largest electronics manufacturers and has grown from producing gadgets such as home appliances and monitoring systems for domestic consumption to producing smartphones for export.

In addition to electronics, India has established a foothold in pharmaceuticals and automobile manufacturing, thanks in part to the “China Plus One” strategy, which has pushed companies to diversify their supply chains and operations.

For example, carmaker Kia India has set up a manufacturing plant in Ananathapur district, more than 200 kilometers from Bengaluru, while local companies Divi's laboratory It is one of the largest manufacturers of active pharmaceutical ingredients, with customers including global giants Novartis, GSK and Merck.

Samir Kapadia, founder and CEO of B2B Markets India Index, said India's manufacturing sector has seen “significant” growth. For example, it has benefited from infrastructure developments such as a six-fold increase in highway construction over the past two decades and a 40 percent increase in average freight train speeds, he said.

“These infrastructure shifts in India, which improve connectivity at home and abroad, put India on a very different playing field than when 'Make in India' started 10 years ago,” Kapadia told CNBC's Inside India.

He expects the economy to grow further based on the $1.3 trillion in infrastructure development funds set aside by the government between 2021 and 2046-25, as well as ongoing partnerships and efforts by businesses.

But what excites him even more is that “India will get incremental arbitrage as it takes market share from China sector by sector, sector by sector,” Kapadia added.

For context, market research firm OnePoll surveyed 500 U.S. executives earlier this year, 61% of whom said they would choose India over China if the two countries could produce the same materials, while 56% of people prefer India to meet their supply chain needs over the next five years.

“What India is going to do is much more ambitious – I see its entire workforce leapfrogging into industries like semiconductors, advanced manufacturing, aerospace and medical devices,” Kapadia said.

India and other emerging markets

While India hopes to grab China's manufacturing share, other countries such as Indonesia, Vietnam, Bangladesh and Mexico are also strong competitors.

Indonesia's manufacturing capabilities include nickel and battery materials, while Vietnam's comparative advantages lie in broadcasting equipment and machinery, among others. Bangladesh has a large share in textile manufacturing, while Mexico, which produces automobiles, aviation and aerospace equipment, has an advantage over India due to its proximity to the United States

However, Franklin Templeton's Liao Yiping doesn't think there's a major cause for concern.

“I think there will always be competition, but every country is going to have its own niche,” an assistant portfolio manager on the emerging markets equity Asia strategy team told CNBC's Inside India.

Liao said India is unique in that its labor costs are relatively low compared to other markets, and the production capacity built there can not only solve export problems but also a huge domestic market with huge consumption potential.

“India still faces a lot of challenges, but they are on a lower base. So even if India's electronics manufacturing grows from 3% to 9%, that's a threefold increase, it's a great opportunity,” she famously said.

What's missing?

While Indian manufacturing is maturing, the industry still has a long way to go before it can help India realize its vision of becoming a developed nation.

Shumita Deveshwar, chief India economist at TS Lombard, said: “The policy intention and direction of Make in India is correct. But we have not seen much change in terms of increasing the share of manufacturing in India's GDP or creating jobs. ” , told Inside India.

In fact, the share of manufacturing in India’s GDP has dropped from around 18% in 2012 to 14% in Recent data shows that this financial year. Indian Investment Company DSP Mutual Fund It is expected that by 2034, the industry's share of total GDP will rise to 21%.

Deveshwar said that what India needs is to improve India's competitiveness by adding higher-skilled employment opportunities.

First, she said, this capability could be developed through vocational training for unskilled workers in areas such as textile manufacturing, which “can be important providers of employment.” Experienced employees can work in semiconductors and high-value-added products, “jobs that require targeted skills,” she noted.

Deveshwar said India also needs foreign investment, which is currently at its lowest point in five years. India's foreign direct investment as a share of GDP lagged behind Brazil and China between 2010 and 2022, which worries TS Lombard economists given India's strong macroeconomic indicators.

“We haven't really seen investment through foreign direct investment, let alone in manufacturing. FDI flows are very skewed towards services and information technology industries, two industries where India has a historical advantage,” she said.

“We have one or two big names coming in and making headlines, but we're not seeing a massive momentum pick-up. I think it comes down to structural faults, like the need for better infrastructure, and that's going to take time to strengthen.”

But Deveshwar said that to be sure, India's manufacturing spurt should not be compared to China's.

“Our ecosystem is very different. So, Indian manufacturing is going to grow and develop at a different rate than China.”

The Governor of the Reserve Bank of India said that India’s economic growth can reach 8%. In an exclusive interview with CNBC, Shaktikanta Das said he expected India's gross domestic product will reach 7.5% in the next few years, and “there is a possibility of an increase.” His comments came after data showed India's gross domestic product (GDP) growth slowed to 6.7% in the second quarter.

this nifty 50 The index is now firmly above 25,000 points as the Federal Reserve's interest rate cuts helped the index hit another record high. The index gained just 0.22% this week but is up 17% year to date.