McKinsey: New formula for India’s manufacturing growth

By Janet Brice
McKinsey & Company identify 11 manufacturing value chains which could pave the way for India to become global supplier of choice – if it can specialis...

India’s manufacturing sector could become the global supplier of choice if they specialise in the future, says a report from consultants McKinsey & Company. 

Eleven high-potential value chains could more than double its manufacturing GDP in a few years, predicts the report which dubs India a “potential manufacturing powerhouse that has yet to realise its promise”.

Developing globally a competitive manufacturing hub post-COVID-19 represents one of the biggest opportunities for India to spur economic growth and job creation this decade.

McKinsey & Company identify 11 manufacturing value chains in their report, A new growth formula for manufacturing in India, which they predict will have strong potential for the country to operate in international markets, power growth and provide long-term employment. 

“The potential comes from several factors. First, these value chains are well positioned to capitalise on India’s advantages in raw materials, manufacturing skill and entrepreneurship,” outlines the report.

Secondly it could tap into four market opportunities: 

  • Export growth 
  • Import localisation 
  • Domestic demand 
  • Contract manufacturing 

“Finally, the 11 value chains also stand to benefit from a fresh, focused approach to industrial policy,” says McKinsey & Company who point out that India’s natural resources from iron ore to cotton and low-cost labour are a boon to makers of basic metals, textiles and apparel, renewable energy, and chemical products.

Three priorities for supporting the growth of India’s manufacturing value chains would include these new reforms:

Raise productivity

The report states that to become globally competitive, India’s manufacturing value chains must lift their productivity closer to global standards. 

“Improvements to key manufacturing processes could increase the productivity of Indian companies in the chosen value chains by a factor of five - with a tripling of labour productivity and a capital-productivity increase of one and a half to two times,” commented McKinsey & Company. 

The adoption of technologies and investing in analytics and reskilling could accelerate this process. Other opportunities to boost productivity include value-added goods, with higher product quality, better packaging and stronger brands. 

“Such enhancements would allow them to command higher prices, leading to one and a half to three times higher GVA (for example, in food processing, capital goods, steel, and steel products). Unlike other opportunities described in this section, this one can be captured without making major investments, which would improve companies’ ROIC,” says McKinsey & Company.

Securing know-how and technology

Manufacturers must source technology through acquisitions, alliances and secure government help. “One approach: create a stable framework of time-bound and conditional localisation incentives to entice global companies to set up operations in India, either independently or with a local partner,” says the report.

Accessing capital

The availability of capital will be the single-biggest obstacle. India’s manufacturing sector will need investments totalling $1.0 trillion to $1.5 trillion over the next seven years to double its GDP in the same timeframe if India also raises its GVA capture in these value chains by 25%.

“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,” predicts McKinsey & Company.

According to the report, for manufacturers to unleash their potential they will need to follow four opportunities:

  1. Growth of domestic sales ($180 billion of additional GVA).

Indian manufacturers could tap into healthy consumer markets for products such as fast-moving consumer goods, consumer durables, food products and renewables.

  1. Export growth ($70 billion to $75 billion of additional GVA).

Exports of manufactured goods could increase from 14% GDP to more than 25%. To compete in foreign markets, manufacturers must achieve economies of scale, meet international quality standards, comply with foreign regulations and sustain R&D investments.

  1. Import localisation ($55 billion to $60 billion of additional GVA)

McKinsey & Company’s analysis suggests an opportunity to reduce India’s spending on imports from 30% of all manufactured goods to 15-20%. To capture this opportunity, domestic manufacturers would need to upgrade the technology and quality of their offerings while lowering prices. 

  1. Contract manufacturing for global markets ($4 billion of additional GVA)

Manufacturers could fulfil overseas orders through tolling (where one company provides the raw materials to a third party, which manufactures the product) or contract manufacturing.

“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,” concludes the report.

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