5 steps India can take to attract investment in manufacturing

There’s been a great deal of talk in recent months about advanced manufacturing supply chain migration from China, with India expecting to be a major beneficiary. Indeed, the Government of India and many State governments are increasing their efforts to attract this type of investment.

Is it realistic to expect manufacturers to leave China? I think the answer is “Maybe, but not in any significant numbers”. Rather, there will be instances where manufacturers want to reduce their China reliance and add factories in one or two additional locations. 

A second question I’m increasingly asked by friends in India is, “are UK manufacturers now thinking about investing in India?”   

The simple truth is that India has been an important manufacturing base for UK companies for decades.  Rolls Royce, BAE Systems and JCB are just a few examples of UK businesses that have long been making in India. Perkins Engines is a more recent example. 

So, given that India is not a new opportunity or location of interest for UK companies, it might be fair to ask, “is India becoming a more attractive destination?” 

In this case, I think the answer is “Yes, increasingly so. Particularly if recently announced reforms are delivered”. Here I’m thinking of the 4 Ls referred to by Prime Minister Modi in his address to the nation on 12 May – land, labour, liquidity, and legal efficiency.  

The States of the Nation 

As ever in India, announcements by the PM need backing by State governments. The State governments are critical, not least as land is a State responsibility and labour laws are a shared responsibility between the centre and states. 

So, in attracting manufacturing investment, the states and the centre have important roles to play in enacting strategic policy reforms and in undertaking tactical marketing to engage businesses. 

To succeed, it’s therefore vital that governments adopt policies and approaches designed to win in the future, rather than in the present trade and global manufacturing supply chain scenarios.  

Build a Strategy to Win in the Future 

Increasingly, supply chains are regional, with manufacturers clustering close to the end consumer, regardless of whether the consumers are in North America, Europe or Asia.  

Manufacturers are also increasingly making location decisions based on quality rather than cost. According to a January 2019 McKinsey Report, only 18 percent of supply chain location decisions were based on labour costs. The same report highlighted that supply chain trade is becoming more knowledge-intensive, with increasing value in IP, R&D, and brands. 

Prioritise Regional over Global 

So, what does India need to do to attract investment in this context? 

 I would recommend 5 areas for policy focus centred around the four L’s and regional integration: 

1. India should increase its efforts to expand trade and investment collaboration in Asia so that it can benefit from increasingly friction-free trade across the region, particularly with ASEAN, a region increasingly rich in consumers and manufacturers. 
2. Labour. As well as making its labour market more flexible, India will need to focus on developing a workforce that has the skills of the future. That means a focus on STEM, digital and creative skills. Alongside this, India will benefit from a much closer and collaborative interface between industry and the science being developed in academia. 
3. Land for manufacturers needs to be in the right place. That is, close to efficient ports and to skilled workers. The land needs to be well-connected by road and rail, so infrastructure investment is important too. 
4. Laws. As the UKIBC’s ease of doing business report repeatedly highlights, legal and regulatory issues are the main barriers to investment. The traditionally change-averse judiciary has introduced very welcome changes in recent weeks with the adoption of digital technology to continue working during the Covid-19 lockdown. These recent changes need to be maintained, and others introduced. 
5. Liquidity is important, not just for companies but for households. If manufacturing supply chains are clustering close to consumer markets, India needs to accelerate its GDP per capita growth. More people with higher disposable incomes will be important. One reason why China will remain important for global manufacturers is that it is now a vast, valuable consumer market. Indeed, 9% of Fortune 500 CEOs identified China as the best investment opportunity – behind the US (74%) and Asia (11.5%), but ahead of India (2%).

In summary, India has a real opportunity to bring in more high–value investment. Mr Modi is right to focus on the 4 Ls, if they are approached in the broad sense outlined above. Alongside these reforms, India needs to forge closer regional trade links. Together, this will make India more competitive and more attractive to international investors looking to access Asian markets.  

Such strategic policy reforms, along with the right tactical marketing to engage with international manufacturers will put India at the heart of future trade flows.  

In my blog next week, I’ll focus on the approach I think governments across India should take to this tactical marketing. There are pockets of excellence that should be copied and built upon.