Three priorities for supporting the growth of India’s manufacturing value chains

Three priorities for

supporting the growth of

India’s manufacturing 

value chains

As India’s turning point makes clear, various reforms can help lift the competitiveness of India’s companies. These reforms include some that target particular sectors. In this section, we look more closely at three sets of policy interventions that could—if enacted in conjunction with actions that manufacturing companies themselves can take—accelerate the growth of manufacturing value chains specifically. (For an example of how such policy interventions and business actions can work together in an individual value chain, please see the sidebar, “Catalyzing growth in the agricultural and food value chain.”)

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Raising productivity

To become globally competitive, India’s manufacturing value chains must lift their productivity—in GVA output per full-time-equivalent worker—closer to global standards. They have a long way to go in this regard: their labor productivity and capital productivity are both low. Compared with India, manufacturing productivity in Indonesia is twice as high; in China and South Korea, productivity is four times higher. (Especially wide disparities can be seen in certain sectors. For example, South Korea’s electronics manufacturing sector is 18 times more productive than India’s, and its chemicals manufacturing sector is an astonishing 30 times more productive.) While other developing economies such as China have managed to catch up with advanced economies in capital productivity, India’s capital is only about two-thirds as productive as China’s.

Policy reforms that help create better infrastructure and logistics could also help Indian manufacturing become more productive. Many of the country’s manufacturers particularly need ecosystems of nearby suppliers. For example, companies that make high-tech goods such as computers, electronic and electrical equipment, and telecommunications equipment must have reliable access to components. By providing incentives to suppliers that operate within port-proximate export-processing (or coastal economic) zones, policy makers can make a tremendous difference in favor of Indian manufacturers.

Securing know-how and technology

While India’s established manufacturing value chains possess the technology and know-how they need to compete with overseas peers, the less-developed value chains do not. To be sure, manufacturers themselves must source technology through acquisitions and alliances. The government can also help. One approach: create a stable framework of time-bound and conditional localization incentives to entice global companies to set up operations in India, either independently or with a local partner. For example, leaders in India’s automotive industry generally believe that high import tariffs on finished vehicles allowed the industry to develop local product-development, supplier, and manufacturing capabilities. Over time, this manufacturing base grew stronger and more competitive, enabling exports of automotive components and finished vehicles to reach more than $25 billion even as these tariffs were progressively reduced.1

Additional support for high-technology and low-carbon value chains might come from viability-gap funding (VGF), in which the government provides some capital to make projects financially viable. For example, India imports nearly all of the LCD panels that go into electronic devices made in the country. The country lacks the technology to set up an LCD-panel factory, and the investment case for such a plant does not hold up in the current tariff regime. Combined with time-bound tariffs or incentives, VGF could help improve the returns from investments in such a factory to 10 to 12 percent of the invested capital.

Accessing capital

The availability of capital will be the single-biggest obstacle to increasing India’s manufacturing GDP. With an incremental capital-to-output ratio between 4.5 to 6.0 (which could become more favorable with productivity gains), India’s manufacturing sector would need investments totalling $1.0 trillion to $1.5 trillion over the next seven years to double its GDP in the same timeframe, provided that India also raises its GVA capture in these value chains by 25 percent.

India has an opportunity to raise its manufacturing competitiveness and become a supplier of choice not only for its large consuming class but also for global markets. The specialization approach that focuses on eliminating roadblocks in the chosen value chains holds great promise for bringing together manufacturers and, with government support, raising productivity, securing superior know-how, and generating higher returns on capital.

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