Indian infrastructure, manufacturing, quality, and the US$2,400 car

May 4, 2007

Executive summary

Manufacturing is geared to play an increasingly important role in India’s economy. Despite inflationary pressures that suggest a slight cooling in overall economic growth this year, continued record growth rates in the manufacturing sector will likely help to keep overall economic growth between 8% and 9%.

Industry group representatives give a number of reasons for the surge, but none figure quite so prominently as domestic demand.

For India’s manufacturing sector to continue on this trajectory, several hurdles must be overcome, including inadequate infrastructure, cost-saving demands from price-sensitive consumers, and difficulties in exporting.

Investment in increasing labor productivity and the flexibility of labor regulations will also be crucial to the sector’s continued growth. All of this adds to the unique environment for Indian manufacturers, one that has the ability to develop niche products that will create new markets and expand existing ones.

New highs for manufacturing growth

As the Indian economy steams ahead, manufacturing has grown in tandem, matching or slightly exceeding overall growth rates. Unlike India’s agricultural sector, which has slowly declined in its contribution to India’s GDP over the last several years, manufacturing’s share of GDP has remained relatively constant at 15%, and is likely to increase.

Cygnus Business Consulting and research, a Hyderabad-based business consultancy, calculates that the top five growth industries in manufacturing are gems and jewelry – one of India’s top manufacturers exports, making up more than a quarter of exports to the United States – cement, steel, pharma, and engineering goods.

Foreign direct investment (DFI) has trebled over the previous fiscal year, and the Federation of Indian Chambers of Commerce and Industry (FICCI) estimates that one-third of FDI now goes to the manufacturing sector, and mostly into capital-intensive industry.

Why the sudden surge?

Dilip Chenoy, director general of The Society of Indian Automobile Manufacturers (SIAM), believes the manufacturing surge is driven by “100% domestic demand.” Chetan Bijesure, assistant director with the Federation of Indian Chambers of Commerce &. Industry (FICCI), agrees.

“The middle class is growing”, says Bijesure. “Its income is rising, and its buying power will continue to grow.” India’s middle class is estimated to be between 200 to 300 million and adding 40 million more people each year.

Dr. Sarita Nagpal, manufacturing services head with the Confederation of Indian Industry (CII), says that manufacturing locally is often key to success in the Indian market because of its idiosyncrasies.

“It takes market savvy”, she says, to design the kind of products that will appeal to Indians and function in the market. Dr. Nagpal cited the example of a ceiling fan motor – “only an Indian manufacturer would know to make a fan that can handle India’s wildly fluctuating voltage.”

Reinforcing her point, during a mid-April visit to Delhi, GM chairman Richard Wagoner explained that GM’s local manufacturing unit had to adjust gear ratios for India’s unique traffic conditions and to compensate for differences in India’s fuel quality