Make In India: Steering manufacturing growth

Friday, 11 March 2016

Bimal Tanna, Partner and Leader, Industrial Products, PwC India
Kavan Mukhtyar, Partner, PwC India

Dhiraj Mathur, Partner, PwC India
Anurag Garg, Director, PwC Strategy&, India

Overview of the Make in India programme

Over the last few years – especially since 2012, the manufacturing sector in India has witnessed a slowdown in its growth trajectory. Investment interest in manufacturing has ebbed as the industry has been facing issues such as muted domestic demand, inadequate infrastructure, expensive cost of capital, lack of clarity on taxation matters, archaic labour laws along with delays in land acquisition and environmental clearances. After the new National Democratic Alliance (NDA) government came into power in 2014 with a majority share (a shift from earlier coalition governments), the expectation and focus has been on reviving the manufacturing sector and creating a favourable environment to drive future growth. While the initial progress had been slow, the Indian government has now launched a large scale Make in India programme, where the aim is to increase the manufacturing sector’s contribution to GDP from around 16%-17% to 25% by 2020. The programme is focused on investment promotion and job creation in 25 sectors such as automotive, defence, renewable energy, mining, pharma and electronics.

It is heartening to see that in the recently released FICCI–PwC Strategy& India Manufacturing Barometer: Winds of change report, 85% of the CXOs interpreted this initiative as encouraging production in India, either by Indian companies or by MNCs; and not just as a marketing campaign to attract foreign investment, or to promote improvement in the ease of doing business. Additionally, the government from its end has undertaken a series of additional steps to propel sector growth. It has announced development of five industrial corridors along with the creation of 100 smart cities which would in turn benefit sectors such as capital goods and building materials. Efforts kick-started to enhance ease of doing business are visible with India moving up 12 places in the World Bank’s ranking. Foreign Direct Investment (FDI) in select sectors too has been liberalised.

To provide a more detailed perspective, we outline two key sectors which are expected to be significantly impacted by the Make in India programme – automotive and defence.

Make in India for the automotive sector – focus on ‘reverse innovation’

The Indian Automotive industry started its globalisation journey with the setting up of Maruti Suzuki in the mid-1980s. For the next more than 30 years, innovation has mostly flown from Japan, Korea, Europe and US to the India based automotive OEM and component industry. This happened through various channels including subsidiaries, joint ventures, technology licensing, and alliances.

As competition intensified, companies realised that to have sustainable success they need vehicles designed specifically for India - vehicles that are affordable yet have the right styling; spacious and feature rich with modern technology. Although value conscious, Indian customers are discerning and buy vehicles that are perceived as aspirational. This customer trend, combined with the robust engineering talent and lower product development cost, has triggered new models being developed specifically for the Indian market. In the recent past, Automotive OEMs have seen tremendous success with their India developed models. They soon realised these models could be world-beaters and not just appealing to the Indian market. This was the start of ‘Reverse Innovation’ – India developed vehicles and technology flowing to the world market.

The Make in India mission has brought sharp focus on innovation as India’s differentiator. Further emphasis on proactively building the innovation ecosystem is necessary. India needs to enhance its automotive industry-specific innovation strategy and operating model. Investments need to be sought in upgrading the innovation capability of the entire value chain with special focus on the Tier 2, 3 auto component companies - access to innovation capital can be a key catalyst.

‘Reverse Innovation’ is now a trickle, but India has a golden opportunity to transform this trickle to a wave by nurturing and harnessing the innovation ecosystem. India can then pull investments through its automotive innovation capabilities and growing domestic market. Make in India Automotive has a huge potential to be a super success which can be driven by a single-minded focus on ‘Reverse innovation’.

Make in India for the defence sector – An imperative, no longer an option

The success of the Make in India campaign will largely depend on the extent to which the Government can leverage its large spending program to promote domestic manufacturing. For the defence sector, the key objective is to equip and modernize the Indian armed forces with the best technology in a cost effective and transparent manner; while simultaneously building an indigenous defence industry. In the last one year, the Government has taken several policy initiatives to lower entry barriers and improve the ease of doing business in defence manufacturing.  While the new Defence Procurement Procedure is yet to be announced, the Defence Minister made it clear that there would be a strong and unambiguous focus on Make in India. Some of the proposals under consideration include:

  • Strategic Partnership model: Moving away from a very transactional approach to defence procurement, to a strategic long term partnership approach, which provides assurance to Indian companies (selected to be strategic partners in six major platform categories) about getting orders on a long term basis so that they can make the large capital investments required.
  • Driving local content and IP: Giving highest preference to a new category of program – Buy Indian Design Development and Manufacturing (IDDM) – Under IDDM, any order will require at least 40 percent indigenous content if the design is indigenous, in addition to development and manufacture. In the absence of an indigenous design but with indigenous development and manufacture, the required percentage of indigenous content will be 60 percent.
  • Inclusion of Micro, Small and Medium Enterprises (MSMEs): Specific “Make III” category reserved for MSMEs, though the funding aspect still needs to be resolved – as development costs can be to the tune of INR 30 million and bearing it for over 2 years would be difficult for MSMEs.

In addition, some measures have already been taken by the government. These include:

  • Improved ease of doing business: A slew of measures in this direction, including export No-objection Certificates (NOCs) given online, reduced list of items requiring licenses, granting of defence licenses fast and in bulk, increasing validity of defence licenses, as well as allowing foreign companies to change offset partners while delivering on offset obligation.
  • Policy Liberalization: The Indian Government has liberalized the FDI policy, allowing up to 49% under automatic route, including to Foreign VC investors, providing added flexibility. There will be only one track for all FDI proposals for foreign investment in excess of 49% - with consideration by the Foreign Investment Promotion Board (FIPB) and approval by the Finance Minister/Cabinet Committee for Economic Affairs, instead of the Cabinet Committee on Security (CCS); making the process simpler.

While these measures appear positive, there are still challenges ahead. For instance, almost 70% of the raw material in aerospace has to be imported – even by players such as Hindustan Aeronautics Limited (HAL) – as composites and many exotic alloys are not made in India and neither is there enough of a market to justify the large investments. Hence, achieving 60% indigenous content shall be a challenge. Similarly, the IDDM program is attractive at face value, but making it number one in the hierarchy will risk delays in acquisition, since designing and developing a new platform can take more than a decade and at a large expense.

While the Indian private sector companies are enthused, the success of Make in India will also depend on foreign OEMs and their value chain partners changing their strategy – an imperative to be able to qualify and to continue to play in most defence programs in India by having some local presence via Transfer of Technology (ToT), co-development, and / or manufacturing. Overall, the signs from the government are positive; the Indian private sector companies are getting increasingly committed to defence production and the local ecosystem is ripe for foreign partnerships.

Future outlook - Make in India as a growth enabler

In conclusion, while some have concerns regarding volatility in growth markets, India is acknowledged all across as a bright spot in the global economy. There is a sense of cautious optimism as the Indian government continues to show intent to undertake structural reforms in manufacturing across multiple sectors. However, passage of key legislations and on-ground execution of its policy proposals needs to be expedited. We are hopeful that the Make in India program will act as a significant enabler and provide much needed momentum to steer the manufacturing sector to the next level of growth.

Bimal Tanna | Partner and Leader, Industrial Products, PwC India

Kavan Mukhtyar | Partner, PwC India

Dhiraj Mathur | Partner, PwC India

Anurag Garg | Director, PwC Strategy&, India


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