A Big Manufacturing Boom in India. How to Invest In This Opportunity, Suppose someone asks you name the first country that comes to your mind when you hear the word ‘manufacturing’.
Which country would it be? Most likely, it would be China, US, Germany, or Japan. Almost everyone would name one of these countries.
One country you wouldn’t name is India.
India is the world’s fifth biggest manufacturing nation by output. India is also the world’s fifth biggest economy. So that seems like how it’s supposed to be.
In an economy of the size a little bigger than US$ 3 trillion (Rs 250 tn), manufacturing’s contribution is about 17% or about US$ 500 billion (bn).
So Indian manufacturing, taken together, is more than half a trillion dollars in size. There are only about 25 countries in the world with economies larger than that.
So on the face of it, there’s nothing wrong with manufacturing in India.
But dig deeper and you will find a laundry list of problems. It’s not all about size.
The Problems with Indian Manufacturing
There are two big problems with Indian manufacturing.
- Low value addition
- Lack of job creation
In simple words, these are explained in the following two sentences.
- India doesn’t produce high value products like capital goods and high end consumer goods.
- Indian industry doesn’t create anywhere near the number of jobs that it should.
These are not two separate problems. They are the same. We can restate the points above as follows.
Indian manufacturing units are small and thus can’t compete globally.
If a country wants to have a thriving manufacturing sector, which creates lots of jobs, its individual production units must be able to compete against the best in the world, either on price or quality.
Most Indian manufacturing firms struggle to compete on either. Their small size means they haven’t moved up the value chain (quality) and they don’t enjoy the benefits of economies of scale (price).
Thus productivity remains low in Indian manufacturing by global standards.
A Different Future
So this was about the past. But what about the future?
Well, it’s looking increasingly likely that the future is be bright for Indian manufacturing. Join Our Telegram Channel
Let’s examine the reasons for the same and then check out the top sectors that will drive India’s manufacturing boom.
The government’s infrastructure push
The government knows that it’s Make in India initiative will succeed only if it’s backed by world class infrastructure.
India has been building roads at a record pace as a part of the infra push. The railways have received record amounts of funds to expand as well as modernise their network.
Ports have received vital coal linkages. New airports are coming up all over the country. Electrification of the entire country is almost complete. Initiatives to get clean drinking water and natural gas to every corner of the country is proving to be a success.
All this has had a hugely positive impact on India industry.
Industry friendly policies
The government has done a commendable job in creating a business friendly culture in India.
There have been many speedbumps along the way like demonetisation and the initial messy implementation of GST. But by and large, the government’s policies have encouraged the private sector.
The national manufacturing policy and the PLI schemes are steps in the right direction.
Use of Technology
Historically, Indian firms were slow to adopt the latest technology.
Now that is not the case. The Indian start-up boom and the digital revolution has pushed traditional industries to modernise.
Indian manufacturing is slowly but surely moving towards being more automated and process driven. This is already showing benefits as companies across sectors have started to profit from the cost savings ad higher value addition.
This will also drive more domestic production as components that were being imported will now be made at an affordable price domestically.
China Plus One
China had come to dominate the world of manufacturing. However, attitudes towards China have changed significantly.
Covid taught the world a valuable lesson. Companies cannot depend on China alone for sourcing raw materials or manufacturing finished products.
India has emerged as an attractive alternative to China for countries looking to diversify their manufacturing operations.
Other reasons like a young workforce and the use of the English language and the adoption of global best practices in management are also contributing to the Indian manufacturing boom.
The 4 Best Ways to Play This Megatrend
The Indian manufacturing megatrend is here to stay. Investors in the stock market should not miss this opportunity.
But which sectors or themes are the best ways to play it?
Here we present a short list. Please note this a curated list based on our high conviction. This list could and probably will change in the future.
Also this is not a recommendation to buy any stock from these sectors. That should only be done after in-depth research.
Here are the top 4 manufacturing plays in India right now…
In March 2020, the Indian government approved a new incentive program called the Production Linked Incentive scheme (PLI) for large scale electronics manufacturing.
This was to target makers of mobile phones and certain electronic components by offering financial incentives to start or build up their existing domestic manufacturing capacity.
The government had approved 32 beneficiaries under the scheme of which 10 (five foreign and five domestic companies) were approved for mobile manufacturing.
India is also building up its semiconductor industry.
This will help to produce products locally and gain a competitive advantage. Just a few years back, we didn’t have many options when it came to semiconductors.
But now, we are seeing small and medium-sized companies innovating and introducing semiconductor parts that offer unprecedented power for the price.
This is a big opportunity for not just Indian investors, but also ambitious startups, and even large corporations that want to be at the forefront of this boom.
In the next 20 years, massive demand for application processors, memory chips and connectivity solutions will make India a global semiconductor hub. Join Our Instagram Channel
Investors should keep a hawk eye on the developments in India’s electronics ecosystem.
Rising environmental issues have forced us to think a lot about sustainable alternatives.
Be it a shift from plastic bags to paper and cloth bags or coal to solar and wind energy, we’ve all been thinking ‘green’.
Renewable energy, green hydrogen, and electric vehicles promise a safe future. Though new to the market, developments in these emerging themes are happening at a very fast pace.
A lot of money is being invested in capturing the growing demand for green energy.
There are exciting opportunities for investors in this space. Investors should have on their radars, stocks with a focus on wind and solar energy, green hydrogen, energy exchanges, power producers, component manufacturers, and the broader clean energy ecosystem.
Electric Vehicles (EV)
This one is a no brainer. Every auto company in the world has a plan for the EV space.
In India Tata Motors has taken a big early lead. But the contest is far from settled.
There will be opportunities galore in this space over this entire decade. Investors should take their time to study this industry and find the right stock ant the right time.
You see, according to a report by the India Energy Storage Alliance, the EV market in India is expected to grow at a CAGR of 36% until 2026. Furthermore, the EV battery market is expected to grow at a CAGR of 30% over the same time period.
After recovering from the Covid-19 pandemic, the Indian automobile sector is growing rapidly in 2022-23. Electric vehicles, particularly two-wheelers, are expected to have increased sales in 2022-23.
By 2030, India might be a global leader in shared mobility, paving the way for electric and autonomous vehicles.
By 2030, the electric vehicle industry is also expected to generate 50 m jobs. Observing governments’ plans for this sector, several automobile firms are diving into the electric vehicles business.
To meet India’s EV ambitions, a cumulative investment of US$ 180 bn in vehicle production and charging infrastructure would be required until 2030.
Looking at these initiatives by the government, one can imagine how stocks in this sector will become a multibaggers in the future.
This will be huge. Defence spending by the government is growing by leaps and bounds but to the activities of our two neighbours China and Pakistan.
Until recently, India was the largest arms importer in the world.
We were dependent on countries like France, Israel, US, and Russia to meet the need for critical military systems.
None of the developed economies, the US, UK, France or China, are dependent on others for its own territorial security. It was high time for India to catch up.
And catch up it did. India has learned the lesson that it needed to be self-reliant in the defence sector.
A key area to watch would be the unmanned aerial vehicles (UAV) space which has be deregulated. Companies involved in the exploding drone market are the talk of the town. Drones made in India will only cost a fraction of imports and hold the potential to create high-tech jobs.
Given the increasing focus on self-reliance, the Ministry of Defence (MoD), has set a target of doubling the defence production to US$ 25 bn by 2025. To achieve this, the MoD is focusing on boosting defence exports.
The long-term picture here is bright. There’s a massive opportunity for investors in defence space in this decade and beyond.
The future is exciting for India’s manufacturing firms. It’s even more exciting for investors in this space.
When selecting your investments pay attention to fundamentals of the companies, their long term growth prospects as well as the valuations of the stocks.
Finally, don’t be in a haste. There are plenty of opportunities and there is a long runway ahead. Take your time to pick the right manufacturing stocks at the right time.