Rome wasn’t built in a day — India’s Manufacturing Sector
Introduction
India is estimated to have become the world’s most populous nation since July 2023, surpassing China.¹ India’s economy has also seen substantial growth in the recent past. The country’s economy has catapulted to become the world’s fifth largest in 2021 (by nominal gross domestic product), from the 17th position in 1991.² The sheer size of India’s population and economy make the nation a crucial player in the global stage.
While India’s large and young population is certainly a boon (around 50% of the population is below the age of 28³), it also exposes the nation to certain vulnerabilities. As manufacturing value chains fragment across various geographies, excessive reliance on a few countries for essential commodities such as pharmaceutical products, processed food, electronics, and automobiles could put the nation in grave danger.
The COVID-19 pandemic is a good case in point. The production and distribution of vaccines became a major cause of concern as the world scrambled for vaccines against this deadly virus. Thanks to India’s home-grown pharmaceutical industry (in specific, Bharat Biotech and Serum Institute of India), India was able to administer over 2.2 billion doses⁴ within a short period of time. Apart from vaccinating those within the country, India was also in a position to supply around 301 million doses of vaccines to around 100 nations.⁵ One shudders to think where India would have been, if not for the nation’s capacity to manufacture complex pharmaceutical products.
The example illustrates why it is important to consider strategic interests (such as building value chain resilience), along with standard economic requirements, while choosing to incentivize the onshoring of advanced manufacturing industries.
While the need for onshoring advanced manufacturing industries for strategic interests is well-established (as seen from the COVID example), one wonders where India’s manufacturing sector currently stands and what pivotal industries need to be onshored.
India’s Manufacturing Sector — Where does it stand?
In the past decade, the manufacturing sector has roughly contributed between 13% to 16% of the nation’s GDP.⁶ The global average is around 16%, and that for China is around 28%.⁷ The size of India’s manufacturing sector is not too far from the global average, but is substantially lower than a manufacturing led economy such as China. Irrespective, the fact that manufacturing sector forms a key part of the Indian economy is undeniable.
The top industries in terms of gross value addition⁸ (GVA) include, chemicals, basic metals, food processing, pharmaceuticals, and automobile manufacturing. In specific, the growth in the automobile manufacturing and pharma industries has been quite impressive. These industries have grown at a CAGR of over 9% between FY’1999 and FY’2020 (after adjusting for inflation).⁹ The access to India’s massive consumer market, coupled with the availability of skilled talent have been key factors in fueling this rapid growth.
The growth in the automobile manufacturing and pharma industries have been quite steady between 1999 and 2020, despite minor ups and downs along the way.
India is seeking to diversify beyond its current specialization in industries such as automobile manufacturing and pharma. As the world becomes increasingly reliant on digital solutions for everything from payments to healthcare to defense, there has been a sharp rise in the importance of semiconductors to a nation’s economy and defense.
In the recent years (post 2018), the Indian government has been formulating policies to incentivize the manufacturing of electronics and semiconductors in the country. A key document that summarizes the government’s initiatives is the National Policy on Electronics, 2019.¹⁰ The preamble of the policy declares, “The Government attaches high priority to electronics hardware manufacturing and it is one of the important pillars of both “Make in India” and “Digital India” programmes of Government of India”.
Mobile phone manufacturing is a prime aspect of this policy. One of the key programs to promote the manufacturing of mobile phones in India is the ‘Production Linked Incentives’ scheme, where manufacturers are provided a subsidy worth 6% of their incremental sales value (from an agreed upon base year sales value) in the first year, coming down to 4% in the fifth year.¹¹ This policy of the government has come under heavy criticism. One of the recent studies that criticized this policy is Rajan et al. (2023).¹²
The central argument of the study is that the policy has failed to attract higher levels of value addition in mobile phone manufacturing (beyond simple assembly). To establish this, the study shows how India has become a net exporter of mobile phones, however, this is built on an increased import of sub-components. This is a well recognized and agreed fact, that India has not really penetrated the electronic component manufacturing industry yet. However, does the lack of a sizeable electronic component manufacturing industry in India, five years since the introduction of the policy, imply a catastrophic failure of the policy? This is the question I would like to delve into.
Before jumping into this, I would like to first address a methodological issue in the study. The study combines net exports from the final product (i.e., mobile phones) with the net exports of the components (i.e., electronic components) to show that India has actually become more reliant on imports for mobile phones (Figure 3 of the study). This is a little misleading.
It is established (and the study also concurs) that India has limited presence in the electronic component manufacturing industry, and that much of the components are imported from abroad. If this were the case, the components imported to India would be used in both mobile phones that would be exported abroad, and in mobile phones that would be consumed within India. Hence if 100 cameras are imported, 80 might be used in mobile phones that would eventually be consumed in India, while 20 might be used for mobile phones that will eventually be exported. It is important to note that the import-export data does not capture the value of mobile phones assembled in India that are also consumed domestically. Hence, combining the exports of the final product with the imports of the components is akin to comparing the import cost of 100 cameras, against the value of just 20 mobile phones that are exported.¹³ This doesn’t really mean we are more reliant on imports. If we did not assemble mobile phones in India, we would have resorted to importing 80 finished mobile phones (instead of their sub-components), which would have only increased our imports.
Irrespective, the analysis of the study is accurate in highlighting that the value addition in India in the electronic industry is limited. However, my question is — does this mean the policy is a complete failure?
I argue that backward integration of a value chain, specifically in technically advanced industries such as electronics is time consuming. To expect substantial backward integration within 5 years is a little impractical, that too when roughly two of the five years were mired by a pandemic. To establish the timelines for backward integration, I take the example of the automobile industry.
The Automobile Industry in India
Automobile manufacturing in India picked up immediately post the liberalization of the economy (in 1991). Key players in the industry invested in India between 1991 and 2000. This includes Tata Motors (that produced its first indigenous passenger car in 1991), Suzuki (that increased its stake in Maruti Udyog Limited from 26% to 50% by 1992)¹⁴, and Hyundai (that established its plant in Sriperumbudur and began production in 1998).¹⁵
Naturally, post 1999, the exports of motor cars grew leaps and bounds, as illustrated in the figure below.
However, in the mean time, the share of inputs that were imported remained quite high. It is only post financial year 2012–2013, do we see a marked reduction in the share of imported components.
What happened since 2012–2013? One of the most complicated component of an automobile is its engine. Diesel engine manufacturing in India prior to 2012 was quite limited. Engine manufacturing picked up substantially in India at around 2012. Key developments were Tata and Fiat’s joint venture to produce their 1.3 litre Multijet diesel engine¹⁷ at Ranjangaon (Maharashtra) in 2007, Maruti Suzuki’s new production facility for diesel engines in Gurugram along with the amalgamation of Suzuki Powertrain India Limited with Maruti Suzuki in 2013,¹⁸ Hyundai’s inauguration of its combined diesel and petrol engine manufacturing line in Sriperumbudur,¹⁹ and commencement of Isuzu’s operations in Sri City, Andhra Pradesh in 2016.²⁰
Apart from passenger vehicles, production of engines for commercial vehicles has also increased in India. For example, Daimler Truck AG commenced production in 2012 in Chennai (via a wholly owned subsidiary called Daimler India Commercial Vehicles Pvt. Ltd.).²¹ Another example is that of Ashok Leyland, which entered into a partnership with Hino motors to produce Bharath Stage VI compliant engines in India in 2017.²²
This change shows in the import-export data as well. India became a net-exporter of diesel engines only in 2019. From 1999, it took India a staggering 20 years to turn into an net-exporter of diesel engines. Semiconductors are as complex if not more complex than diesel engines, is five years a practical timeline to expect backward integration?
In terms of other components such as bumpers, breaks, windshields, seat belts, radiators, silencers, gear boxes, suspension, steering wheels, and air bags, India has not been too reliant on imports.
While the simpler components were brought to India much earlier, the more advanced components such as engines took as long as 12–14 years to be brought to India at scale. While the government can target for a shorter time interval for onshoring the manufacturing of electronic components (say 8–10 years), to expect effective backward integration in five years, of which two years were mired by the pandemic, is a tall ask.
Conclusion
Mobile phone assembly is a great starting point for India. However, we must focus on investing in advanced technical education, and formulate business friendly policies to ensure that we effectively attract the growing semiconductor manufacturing industry to base their units in India.
To call India’s semiconductor manufacturing venture a failure in five years is very premature, and could possibly misdirect investors. Rome wasn’t built in a day, the government cannot wake up one fine morning and successfully become a semi-conductor manufacturing superpower. It takes time, and the learning curve is quite steep.
India is heading in the right direction and must continue to do so with more vigor. As the economy digitizes, semiconductors would be the backbone of our economy. This makes it even more important to ensure that we become self-sufficient in semiconductor manufacturing.
Footnotes
[1] Hertog, S., Gerland, P., & Wilmoth, J. (2023). India overtakes China as the world’s most populous country. United Nations Department of Economic and Social Affairs, Policy Brief No. 153. Accessible at: https://www.un.org/development/desa/dpad/publication/un-desa-policy-brief-no-153-india-overtakes-china-as-the-worlds-most-populous-country/
[2] Author’s calculation using data from World Bank national accounts data, and OECD National Accounts data files. Accessible at: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD
[3] Silver, L., Huang, C., & Clancy, L. (2023). Key facts as India surpasses China as the world’s most populous country. Pew Research Center. Accessible at: https://www.pewresearch.org/short-reads/2023/02/09/key-facts-as-india-surpasses-china-as-the-worlds-most-populous-country/
[4] Ministry of Health and Family Welfare, Government of India, as of 10th September 2023 — https://www.mohfw.gov.in/pdf/CummulativeCovidVaccinationReport10Sep2023.pdf
[5] Ministry of External Affairs, Government of India, as of 15 June 2023— https://www.mea.gov.in/vaccine-supply.htm
[6] Author’s calculation based on National Accounts Data from the Ministry of Statistics and Programme Implementation. Accessible at: https://mospi.gov.in/data. GDP at market prices is used (this includes net product and production taxes).
[7] Data for 2022, from World Bank. Accessible at: https://data.worldbank.org/indicator/NV.IND.MANF.ZS?locations=CN
[8] Gross value addition captures the “additional value created by the process of production”. Roughly, it is calculated by removing the value of total input (primarily raw materials and fuels) from gross value of finished products. For a detailed definition see the manual of the Annual Survey of Industries — https://mahades.maharashtra.gov.in/files/survey/ASI%20Manual%202021-22.pdf
[9] Documentation for the public-use micro-data files for years prior to FY’1999 are not fully clear. Hence, I choose to use data from FY’1999.
[10] Accessible at: https://www.meity.gov.in/writereaddata/files/eGazette_Notification_NPE%202019_dated%2025022019.pdf
[11] More details on the policy can be found here: https://www.meity.gov.in/writereaddata/files/PLI%20booklet__english.pdf
[12] Rajan, R., Chauhan, R., & Lamba, R. (2023, June 1). Has India really become a mobile phone manufacturing giant?. The Wire. https://thewire.in/trade/india-mobile-phone-manufacturing-giant-assembly
[13] Ideally the comparison to accurately capture the trade-off should be: [Domestic Consumption of Mobile Phone — Imports of Mobile Phones + Exports of Mobile Phones] vs. [Import of Components — Export of Components]. If export of components is assumed to be zero, then we have, [Domestic Consumption of Mobile Phone — Imports of Mobile Phones + Exports of Mobile Phones] vs. [Import of Components]
[14] Motohashi, K. (2015). Suzuki Motor’s Expansion in India. Global Business Strategy: Multinational Corporations Venturing into Emerging Markets, 223–241.
[15] Hyundai Motor India Limited, Official Website — https://www.hyundai.com/in/en/hyundai-story/hyundai-motor-india/history-1996-2000
[16] Tata Motors — Archive of Webpage: https://web.archive.org/web/20101206003027/http://www.tatamotors.com/our_world/rearview.php?version=text
[17] Tata Motors — Official Website: https://www.tatamotors.com/press/fiat-group-and-tata-motors-announce-establishment-of-joint-venture-in-india/
[18] Annual Report of Maruti Suzuki for 2012–13, page 56: https://www.marutisuzuki.com/corporate/investors/company-reports
[19] There is a drastic fall in imports of engines (HS Code 840820) since 2012 from the Republic of Korea. The imports fall from USD 275.6 million in 2012 to just 5.3 million in 2017 (Source: United Nations Comtrade queried via World Bank World Integrated Trade Solution Portal). This tallies with roughly the time when Hyundai might have inaugurated their integrated diesel and petrol engine production line. For further details on Hyundai’s combined engine production, see: https://www.youtube.com/watch?v=3XEqPIVhh-Q and https://www.evoindia.com/news/car-news-1/interview-with-ganesh-mani-director-of-production-hyundai-india-on-the-manufacturing-process-of-the-new-i20
[20] There is a drastic fall in imports of engines (HS Code 840820) since 2015 from Thailand. The imports fall from USD 227 million in 2015 to just 7 million in 2017 (Source: United Nations Comtrade queried via World Bank World Integrated Trade Solution Portal). Isuzu had a strong presence in Thailand since the 1960’s (see: https://www.isuzu.co.jp/world/newsroom/details/20201029_01.html). The imports might have been substituted post the commencement of their operations in the Sri City plant in April 2016 (see: https://isuzu.in/isuzu/).
[21] Article from the Economic Times, dated May 26 2022, accessible at https://auto.economictimes.indiatimes.com/news/commercial-vehicle/mhcv/daimler-truck-completes-10-years-in-india-aims-at-100-carbon-free-operations-in-chennai-plant-by-2025/91807999
[22] Hino Motors Official Website — https://www.hino-global.com/corp/news/2017/20171127.html
Appendix — Concordance Table for National Industrial Classification
Author: Akshay Natteri Mangadu — All views are personal.
