14 March 2023
Can India really challenge China as the world’s factory?
Tim is the Senior Research Director and Principal Analyst for IA’s Industrial Automation team. He uses his 20+ year experience to develop best-in-class research for the manufacturing sector and is a frequent speaker on all things research at conferences and industry trade shows across the country.
India has made no secret of its desire to become a manufacturing powerhouse to rival China as the ‘factory of the world’. However, there are number of factors to consider when examining whether this is possible. One of these is the rising indebtedness of the Indian government and its ability to support efforts to expand manufacturing in India. According to a Reuters poll of economists, the Indian government is borrowing a record 16 trillion rupees in fiscal 2023/24 and its gross indebtedness has more than doubled in the past four years.
The Indian government faces a general election next year and used its Union Budget for 2023, unveiled in February, to demonstrate its support for manufacturing and economic growth, with measures including incentives for Li-ion battery production and electronics manufacturing. Union Finance Minister Nirmala Sitharaman declared “the world has recognized India as a bright star”, pointing to India’s projected growth for the current year of 7% (the highest of all major economies).
India has clearly identified technology manufacturing as a sector with potential for future growth. Launched in 2014 by Prime Minister Modi, the Make in India initiative provides a range of incentives to encourage manufacturing growth, with a target of increasing the manufacturing industry’s contribution to GDP to 25% by 2025. And, in January this year, India’s Commerce Minister Piyush Goyal stated tech giant Apple wants to increase manufacturing in the country to cover 25% of all its products, rising from 5-7% of its total manufacturing output, although his statement had not been corroborated by Apple.
Chinese output is a long way ahead
When comparing Indian production output with China, the latter dominates global and regional production. China accounts for around 45% of total global manufacturing output in our manufacturing industry output tracker (MIO), which is around 20 trillion dollars of production per year. From the second half of 2023 onwards, China is expected to see growth rates recover to around 4%, a considerable rate for Chinese manufacturing. Other countries’ manufacturing industries, such as India’s, will struggle to catch up given the dominance of Chinese manufacturing. Both China and India are forecast similar levels of growth through to 2027, but China’s manufacturing dominance means there is realistically little chance of India catching it, particularly without a similar infrastructure and supply chain ecosystem in place.
China and India production output tracker (Interact Analysis, 2023)
India’s manufacturing sector saw strong growth in the years pre-Covid and is showing signs of recovering from the effects of the pandemic. There was a sharp upturn in the seasonally adjusted S&P Global purchasing managers’ index in December 2022, rising from 55.7 in November to 57.8 at the end of the year. Despite predictions of strong performance for Indian manufacturing in the short-term, the country is still feeling the disruptive and financial effects of the Covid-19, which have been a significant contributor to its current debt situation.
India has experienced strong manufacturing growth in the past few years, but it can be viewed as emerging region growth, rather than the growth seen in more mature markets such as Germany or the US. As India matures as a manufacturing base, this could start to fade in a similar way to the trajectory seen in Brazil, where lots of efficiency gains and entry into new markets inflated growth, which then fell back.
Can Indian government policies stimulate manufacturing amid record debt?
India spent heavily on relief for the poor and the effects of Covid-19 and this has led to record levels of debt, with the IMF warning the Indian government that it needs a more ambitious plan for fiscal consolidation over the medium term. India completely shut down for a month and a half during the Covid-19 pandemic and economic growth was much more affected there than in China, which saw a series of regional lockdowns instead. This meant China did not have the same lag in getting production restarted as India. Additionally, at the start of the pandemic, the February shutdown in China coincided with Chinese New Year, when factories traditionally shut for 2 weeks regardless.
India’s indebtedness to annual GDP ratio was projected by the IMF to be 84% by the end of 2022, which is much higher than many other emerging economies, and its sovereign credit rating is at the lowest investment grade. This is likely to have an effect on capex and spending in the medium- to long-term and to affect efforts to overhaul the country’s infrastructure in order to simulate manufacturing growth.
Indian manufacturing growth is likely to be concentrated in specific sectors
While India looks set to make ground in the electronics equipment market, this is unlikely to include semiconductors, and a 10% increase in output in the sector still represents less than 0.5% overall in terms of India’s total manufacturing output. The country has a very strong metal industry, led by global giant Tata Steel, and, looking at the MIO, there is certainly room to grow in sectors such as the chemical and pharmaceutical industry. However, even in industries where it can be seen to be competing, it still lags massively behind China. For instance, China’s apparel and fashion segment is worth over $500bn and accounts for almost 3/4 of global output, compared with just 3.5% ($24bn) for India.
Global Apparel Sector – Market Share by Country (Interact Analysis, 2023)
Why China is likely to remain the world’s manufacturing powerhouse
There is little evidence that India can provide better opportunities for manufacturers than China, other than lower wages. It may well make advances in certain sectors, but it will take much persuasion for many companies to switch manufacturing from an existing strong base. With a huge amount of national debt, it appears impractical for India to become the next China in terms of manufacturing. There are also geographical, trade and infrastructure advantages China has that make this unlikely, including China having a lot more land to expand into for manufacturing compared with the density of India’s population and its concentration in cities.
China is also a hub for mining, with little legislation standing in the way of extraction. For instance, China produces more than half of the world’s silicon and 63% of global output of rare earth metals generating significant value from the trade and use of its natural resources. Furthermore, China’s domestic market for Chinese products is huge. For example, looking at apparel production, $560bn – $160bn is exported, so 75% of production is consumed internally, and this is similar with other sectors, such as automotive. This high level of local consumption is a distinct advantage China has over many other countries, including India.
Another key to China’s success is that it is active in every part of the manufacturing supply chain. Looking at our research, we can see that when it comes to comparing total MIO production the added value of manufacturing , China is 5x value add, compared with 3x in the US and just over 2x in India. In many regions, value add is similar to production as they import a lot of their components. The interesting thing the MIO offers is that it counts every step in manufacturing, so calculated for each component and aspect of manufacturing, providing a more realistic picture for comparison of productivity levels.
All these factors, and the fact that it ‘got there first’ in terms of global manufacturing dominance, place China in a much stronger position and we don’t see it surrendering its crown soon.
Looking into the future – can India take China’s crown?
Simply comparing India and China because of their similar populations or because they are in the same region is a reductive approach. As Germany and its tech base proves, a large population is not essential to compete with the world’s largest economies. Political tensions between China and the West, coupled with lower wages in India may result in some companies turning to India as an alternative manufacturing base.
However, higher inflation rates in India (and many other countries with a large manufacturing base), compared with China, have pushed up the cost of living, raising costs for manufacturers and dampening consumer demand for non-essential goods. This will have a continuing effect on output, affecting its ability to stimulate planned levels of production growth (although India’s inflation rate is starting to fall).
China is so far ahead in terms of output, coupled with an established production infrastructure, ready supply of workers, large domestic consumption rates, geographical space to expand into and abundant natural resources, that trying to take on the might of Chinese manufacturing is like trying to chop down a sequoia with a dessert spoon! With growth projections anticipating China is going to see production output grow at a similar pace to India, it has such as significant lead it will be impossible to catch up unless something seismic happens. China’s manufacturing monopoly looks here to stay.
For more information on the Manufacturing Industry Output (MIO) Tracker, contact Tim Dawson, Senior Research Director.