India is expected to scale up its manufacturing exports to $1 trillion by fiscal year 2027-28 amid favourable trends in manufacturing and growth in priority sectors, said Bain & Company in a report titled, 'The Trillion-Dollar Manufacturing Exports Opportunity for India'.
The six sectors driving export growth will be chemicals, auto, electronics , pharmaceuticals, textiles and industrial machinery.
To capitalise on this opportunity, Indian companies need to focus on having a clear export strategy, the right execution chops, the right partnerships for enabling exports, and an optimal capital expenditure (capex) efficiency focus to build manufacturing capacity, said Bain and Capital.
With growing interest in electric vehicles, the automotive sector will see electric vehicles and components contributing up to $5 billion to this export growth.
According to the report, India’s export growth has been propelled by six megatrends that got fast-tracked during the last two years. These include supply chain diversification, advantages for India in certain manufacturing sectors, government initiatives to bolster manufacturing in the country, capital expenditure infusion into manufacturing sectors, heightened merger and acquisition (M&A) activity, and private equity/venture capital (PE/VC)-led investment in manufacturing.
The trillion dollar opportunity
Despite being the sixth-largest economy in the world and contributing 3.1% to the world GDP, India’s export contribution to global trade is only 1.6%. In contrast, China's contribution to global trade is 15%, while that of the US stands at 8.3%, Germany at 7.9%, Japan at 3.7% and UK at 2.3%.
However, India’s manufacturing exports for FY21–22 reached an unprecedented $418 billion, an overall growth of more than 40% compared to the $290 billion from the previous year and the pre-pandemic peak of $328 billion in FY18–19.
While manufacturing exports have traditionally grown between 5% and 10% pre-pandemic, the sharp rise in exports last year — particularly the past few months — is attributable to the significant increase in share of manufacturing in the country’s exports.
For instance, the manufacturing-led exports in January, February, and March of last financial year were $34.5 billion, $34.5 billion, and $40.4 billion, respectively, a rise of more than 20% compared to FY20–21’s first quarter driven by sector-specific gains (top 15 export categories accounted for over 72% of total export) that have been enabled by a global focus on supply chain resilience as well as specific policy initiatives to promote exports.
According to the report, these 6 megatrends that are shaping India's manufacturing sector:
Supply chain diversification
The report said that post-pandemic diversification of the global supply chain had a positive impact on the growth of India’s exports.
While big Asian economies like Japan began looking towards India as an alternative to China for sourcing their requirements, American companies considered India among the top four destinations for relocation of operations.
In 2021, CO2 emissions in China were 6% (almost 500 metric tons) above 2019 levels— while India’s emissions were 1.4% (30 metric tons) above 2019 levels, helping companies shift to India to comply with their environmental, safety, and health standards.
In chemicals, Indian manufacturers are consistently building on India’s cost advantage and strong supplier base, as compared to other manufacturing hubs, as well as strengths in research and development (R&D) capabilities.
In pharmaceuticals, India’s manufacturing cost is about 30%–35% lower than that of the US and Europe.
In the automotive sector, several global companies are looking at export-oriented production in India because of the cost advantage over the US and Europe and strong manufacturing capabilities. Between April and June FY22, Indian car makers exported 1,27,115 vehicles, more than double the 43,619 units exported in the same quarter in FY21.
In electronics, manufacturers like Samsung,, Wistron, and Foxconn are shifting production to India because of strong manufacturing and R&D capabilities, a growing supplier base, and strong policy support.
In industrial machinery, India is becoming a destination for exports thanks to low manufacturing costs and strong capabilities in technology.
In textiles, India has the cost advantage because of the availability of cheap raw materials and lower wages.
Production-linked incentive schemes initiated by the government will help attract large investments across manufacturing sectors, driving not only domestic growth but also manufacturing-led exports, said the report.
Growth led by the PLI schemes will show up most in the electronics, pharmaceutical, automotive, advanced chemistry cell (ACC) battery, solar, and white goods (home appliance) sectors.
"While the PLI outlay of $47.8 billion planned over five years, starting in 2021, has increased in-country production and helped manufacturing-led exports, the foreign direct investment (FDI) policy initiatives aimed at decreasing the FDI restrictive index have augmented the capital inflow; this is visible from the fact that FDI investments increased by about 65% between 2015 and 2020. Key free-trade agreements (FTAs), including India-UAE Comprehensive Partnership Agreement (CEPA) and India-Australia Economic Cooperation and Trade Agreement (IndAus ECTA), have been signed with a vision to boost bilateral trade, creating an environment for export growth," said the report.
The government has budgeted a 35% year-over-year (YOY) increase in capital expenditure for FY23 to $100 billion.
"With multiple companies reaching high levels of capacity utilisation, there is a strong need for capex addition, and a rise in planned capex of more than six times the planned capex from five years ago is a strong indicator of increased manufacturing activity across sectors," said Deepak Jain, partner in Bain & Company’s New Delhi office.
Manufacturing companies are using the mergers and acquisition route to drive growth and reshape their portfolios to acquire new capabilities and enter new markets and segments.
First-time buyers represented about 80% of the $108 billion in M&A deals in India in 2021, 15.7% of which were in the manufacturing sector.
Private equity led investments
PE/VC investments in Indian firms were up by 55% since 2019, hitting a record of nearly $70 billion in 2021. PE/VC-led investments have particularly been witnessed in the chemical, pharmaceutical, automotive, and electronics sectors, resulting in an increase in manufacturing-led exports.
Meanwhile, multiple subsectors in manufacturing are witnessing an increase in valuations because of buoyancy in the manufacturing sector. At least 18% of the total PE/VC investments in 2021 were in the manufacturing sector, with the majority of them in the pharmaceuticals and chemicals subsectors.
“Despite possible recessionary and inflationary pressure, fundamentals for India’s manufacturing sector remain strong. The mega-trends will continue to play out during the course of this decade which will accelerate India’s manufacturing-led exports," said Jain.
Who is leading the charge in manufacturing exports?
Leading the charge in manufacturing-led exports, India’s chemicals industry is poised for exponential growth. Exports of chemicals are estimated to grow at CAGR 19%–23% ($110–$130 billion by FY28), mainly because of the low cost of manufacturing and rising investments. Specialty chemical and agro- chemical exports are expected to be the key growth segments.
The electronics sector, estimated to grow at a CAGR of 35%–40% to $120 billion–$145 billion by FY28, is one of most attractive sectors for manufacturing-led exports. India offers an advantage of strong manufacturing technology and R&D capabilities in the semiconductor industry focused on chip design and end-to-end supply chain improvement. This could lead India to become the export hub for mobile phones.
India’s textile and apparel exports are expected to grow at a CAGR of 13%–16% to $95 billion– $110 billion by FY28 powered by the presence of end to end value chain; the competitive cost of manufacturing; preferential market access among other factors. Within the sector, technical textiles and man-made fibre are likely to offer immense growth opportunities in global trade.
India’s automotive exports are expected to grow at a CAGR of 15%–18% ($45 billion–$55 billion) by FY28, including electric vehicles (EVs), primarily because of low-cost manufacturing and a large Tier 2 and Tier 3 supplier base ensuring availability of automotive components.
India’s drugs and pharmaceutical exports are expected to grow at a CAGR of 16%–18% ($45 billion–$50 billion) and Industrial machinery exports are expected to grow at a CAGR of 18%–20% ($70 billion–$75 billion) by FY28.