Abu Dhabi, UAEThursday 2 July 2020

India's manufacturing engine stutters as it looks to attract car makers

Although the consensus is that there is huge potential for India's manufacturing sector, analysts say the industry has been struggling. Rebecca Bundhun reports from Mumbai

Kia recently launched a new car factory in India amidst a struggling manufacturing sector in the country. Bloomberg
Kia recently launched a new car factory in India amidst a struggling manufacturing sector in the country. Bloomberg

On Thursday, Kia Motors Corporation officially launched a new car factory in Anantapur in the south Indian state of Andhra Pradesh. The carmaker has invested $1.1 billion in setting up the production facility which has the capacity to produce up to 300,000 cars a year, and created about 12,000 jobs in the region.

“Our new plant allows us to serve the growing Indian car market, and export models to markets across the world in major regions,” said Han-Woo Park, the president and chief executive of Kia, at the launch of the factory. “In the longer-term, it will also become a vital part of our global production network.”

A project like this shows confidence in the country’s manufacturing sector which is striving to become a global manufacturing hub under prime minister Narendra Modi's Make in India initiative. This is aimed at generating economic growth and creating jobs for the country's young population. In a country of 1.3 billion people, with an expanding middle class, it is an attractive proposition for many companies.

But although the consensus is that there is huge potential for India's manufacturing sector, analysts say the industry has been struggling in the short term and faces challenges inhibiting longer term growth.

The latest gross domestic product data reveals that in the quarter to the end of September, manufacturing in India declined by 1 per cent compared to an expansion of 6.9 per cent in the same period last year. This dragged India's GDP growth to a six-year-low of 4.5 per cent in the July to September quarter. The manufacturing slump poses a real risk to the country’s economy.

“This is a matter of serious concern for the Indian economy,” says Rakesh Mohan Joshi, research head at the Indian Institute of Foreign Trade. “The manufacturing sector is extremely important for the economy and it has a multiplier effect on job creation.”

A prolonged slump in consumer demand has taken is toll on sectors including car manufacturing, and consumer electronics, says Mr Joshi. There is also stiff competition from imported goods coming in from other countries, including China and Vietnam.

Another worrying sign is that India's industrial production data for September revealed a contraction of 4.3 per cent on the year, which was its second consecutive month in decline, and its steepest fall since the series began in April 2012.

While the Nikkei Manufacturing Purchasing Managers’ Index, compiled by IHS Markit, for November revealed a pick-up of 51.2 last month from 50.6 in October, the survey also showed that the sector is not yet out of the woods. With companies cutting jobs for the first time in more than 18 months, this suggests a lack of optimism amongst factory owners in the coming months.

“Rates of expansion in factory orders, production and exports remained far away from those recorded at the start of 2019, with subdued underlying demand largely blamed for this,” says Pollyanna de Lima, principal economist at IHS Markit. “The weakness of these forward-looking indicators suggest that firms are bracing themselves for challenging times ahead.”

Another blow to the industry came on Thursday when India's central bank, the Reserve Bank of India, did not cut interest rates in its latest monetary policy meeting, as widely hoped and expected. This could have helped manufacturers to secure cheaper credit for their businesses.

“Of course, revival depends on multiple factors like demand, government policies, and consumer behaviour,” says Sanjay Bhatia, the co-founder and chief executive of Freightwalla, a digital logistics company based in Mumbai.

He adds that there are steps that have been taken by New Delhi that should help the sector, particularly the recent reduction of corporate tax rates to 22 per cent from 30 per cent, which includes a special rate of 15 per cent for new manufacturing companies.

“The whole objective of reducing corporate tax was to drive and attract manufacturing investments from all over the world,” said India's finance minister, Nirmala Sitharaman, speaking in parliament last week. She said there were already signs of foreign companies showing interest.

“Slashing of corporate tax rates will increase the investment in India, resulting in a domino effect,” says Mr Bhatia.

Revival depends on multiple factors like demand, government policies, and consumer behaviour

Sanjay Bhatia, chief executive, Freightwalla

He highlights that there are other obstacles that the manufacturing sector is facing in India, including a lack of suitable infrastructure and a shortage of skilled labour.

“The need of the hour is that the government must focus on its existing policies and ease regulatory norms in order to boost demand,” Mr Bhatia added. “Steps like improving credit growth will help boost the sector as well.”

It does, however, bode well for the industry that the Indian government has said that it plans to invest 100 trillion rupees (Dh5.15tn) in infrastructure over the next five years.

Yet Mr Joshi says that the manufacturing sector has yet to get off the ground in the way that Mr Modi envisions.

The country is still a net importer of manufactured goods, “which implies that India still has a long way to go to realise its Make in India dream”, he says.

Despite the launch of the Make in India initiative five years ago, manufacturing has declined to 15 per cent of the country’s GDP after peaking at 18.6 per cent in 1995, according to data last year from the World Bank.

INDIA-MANUFACTURING
INDIA-MANUFACTURING

India lagged behind China when it comes to manufacturing. China has bigger factories and superior trade infrastructure, such as large ports which are essential for a global manufacturing hub, and its logistics costs are a third of those in India. Other countries are also starting to become more competitive.

“What inhibits are restrictive regulations which affect its land, labour, logistics and also its policies which affect trade and goods and services,” Aaditya Mattoo, an economist with the World Bank said in a Bloomberg report. That is why the production activity that has relocated from China as a result of the trade war with the US “has not gravitated toward India”, he added.

Some analysts have noted that India has had a significant opportunity to capitalise on the ongoing trade tensions between China and the US.

There are success stories for India, though, including the example of the Swedish flat-pack furniture giant, Ikea, which sources about a fifth of its products locally and is expanding in India following the opening its first store in Hyderabad last year. It has plans for more stores in Mumbai, Delhi, and Bangalore.

Electronics giant Samsung opened what was touted as its biggest mobile factory in Noida, north India, last year. The mobile industry group ICEA said that there are now about 80 mobile manufacturing plants operating in the Noida region. Chinese phone maker Vivo also launched a new production facility in Noida last month, announcing plans to invest 75 billion rupees in India.

However, in other segments, production has taken a hit. While Kia may be investing for the long term, the situation this year has been grim for car manufacturers. The industry in India this year has cut hundreds of thousands of jobs amidst weakness in consumer demand, which has prompted manufacturers to temporarily shut down factories and slow production.

For Kia, which has heavily invested in its manufacturing in India, it will be banking on the country’s economy to start picking up its pace soon.

Updated: December 7, 2019 07:51 PM

SHARE

SHARE

Most Popular