The current US political environment is turbulent, but there is rare bi-partisan alignment concerning China’s role in global geopolitics. International policies from both major US parties encourage businesses to relocate operations from China or risk higher tariffs and restrictions. This has left companies across industries wondering where to look for low-cost manufacturing.
In a recent Journal of Business Forecasting article, we discussed key considerations for shifting operations to Mexico; however, many operating models, especially those that have a global customer base, will require a footprint outside of North America as well.
For those sectors whose operations would be supported by maintaining an APAC footprint, India is a compelling option. The world’s fastest growing major economy has enacted business-friendly reforms, is developing supporting ecosystems through investments in areas like infrastructure and transportation and offers access to a growing and highly educated labor pool.
Risk matrix of outsourcing to low-cost manufacturing countries
Favorable Regulatory Environment Encourages Growth
India has made a clear goal to grow its GDP, and the current policy approach is to develop into a regional manufacturing powerhouse. In recent years, India has made progress through several initiatives to become a more appealing operating environment, climbing the World Bank’s ease of doing business index rankings to 63rd in its most recent iteration.
While this is an improvement, India still trails other low-cost economies such as Poland, Thailand, and Mexico. One flagship program to continue climbing the ranks is the Production Linked Incentive (PLI). This program targets growth in key sectors, offering incentives totaling INR 1.97 trillion (USD ~23 bn) from 2020 to 2025 linked to incremental increases in sales of goods manufactured in India by approved applicants.
“Subsidies and lowering barriers to entry signal India’s aspiration to be a prominent player in the global economy.”
To this end, foreign direct investment (FDI) approvals for organizations without ties to China or the Chinese government have been fast-tracked through channels where approvals are largely automated. This program has been successful with reports showing Investments of USD ~13 bn generating production and sales of USD ~103 bn and creating 678,000 jobs. Introducing subsidies and lowering barriers to entry signal India’s continued aspiration to walk back protectionist policies and become a more prominent player in the global economy.
While these are new programs, India’s increasing economic openness is part of a larger trend, stemming from India’s economic liberalization movement in the early 1990s. Prime Minister Modi’s “Make in India” and Atmanirbhar Bharat (“Self-reliant India”) initiatives revitalized this movement since the 2010s by encouraging organic domestic development of manufacturing supported by FDI across several key industries such as pharmaceuticals.
Policies in 2023 tied to these initiatives refocused national agencies to defend India’s position in pharmaceutical markets from low-cost Chinese alternatives. The National Policy on Research and Development in Pharma-Med Tech in 2023 responded to increasing price pressures by creating a foundation for domestic and international players to innovate in the pharma-med tech space, building on PLI schemes already in place for the sector. The policy codified structures in the national education system to ensure sufficient domestic expertise in pharmaceuticals though university programs, and it centralized drug approval processes across several agencies to reduce process time by 50%.
“India is now the 3rd largest nation in pharmaceutical manufacturing.”
India’s efforts have catapulted it to becoming the 3rd largest nation in pharmaceutical manufacturing. This policy specifically targets the pharmaceutical industry, but similar mechanisms exist across several industries and set the stage for broad transformation of India into an ideal operating partner for globalized players in the coming decades.
Investment in Transportation is Allowing India to Compete with Regional Powerhouses
Several manufacturers have taken advantage of open economic policies and invested in manufacturing infrastructure. Major brands based in APAC (e.g., Samsung, Foxconn, Toyota, Hyundai) have shifted manufacturing to India and continue investing to realize scale benefits. In parallel, India launched several infrastructure projects through the late 2000s, and most recently its National Logistics Plan, to continue developing the major arteries required to transport finished goods and raw materials throughout the country and major ports.
In 2009, the central government launched Bharatmala Pariyojana, a USD 140 bn program to build 50 major transportation corridors and connect 550 districts with 4+ lane highways to support freight connectivity across the country. Since 2009, 75% of the program’s projects have been awarded and 25% of the planned roadways have been completed.
Similar programs for air and ocean shipping were also launched. India announced USD 16 billion of investments in its national ocean ports across 150 initiatives. In addition, the country is planning to invest USD 35 bn to operationalize 220 regional airports across the country by 2025 (almost triple the 74 regional airports in 2014), including enhancements to its major international airports.
Programs like these across all modes of transportation eliminated systematic transportation inefficiencies across India, bringing logistics costs from ~14% of GDP to ~8% of GDP which is now in line with global averages. The National Logistics Plan (NLP) seeks to build on these legacy programs’ success with further reductions in transportation costs to ~5% of India’s GDP. These reductions will be driven by cross-ministerial collaboration and a digitization of India’s transportation infrastructure (e.g., eWaybills and a digital toll system). Following the 2023 G20 summit, this plan would cement India’s role in the announced India-Middle East-Europe Corridor (IMEEC), directly competing with China’s Belt and Road Initiative (BRI).
India is Investing Heavily in Logistics Channels
These logistics efforts support initiatives across sectors and the automotive industry, amongst others, has benefited from connections developed between key manufacturing hubs. Tata motors, Mahindra, Volkswagen and other international players have operated in India for the last two decades and doubled their overall CAPEX investment in R&D and Manufacturing from 2014–2024.
Milestones in India’s automotive industry
The country’s various transportation sector developments have supported automotive players to transition from independent manufacturing locations into an automotive manufacturing ecosystem, enabling each region to develop specialties and more easily ship components to the next link in the supply chain. These knowledge clusters build on each other’s capabilities and are merging to become an innovation ecosystem. Smart investments in key knowledge clusters within India can ensure these communities continue to expand to meet the future needs of manufacturers in the region.
Where key Indian and international manufacturers base their Indian operations
Outsourcing to India Overcomes Labor Force Scarcity
Globally, manufacturers will face an ongoing challenge of labor force scarcity as most major manufacturing countries will have declining workforce populations over the next 25 years. Understanding the workforce population and demographic dynamics (e.g., age bubbles) is critical to ensuring long term success. Transitioning to India for manufacturing operations can reduce the risk of declining labor availability in the short and long term.
India’s working age population is anticipated to grow by 16% from 2022 to 2050, developing a large, highly educated workforce. In the same period workforces in China and other Eastern bloc countries popular for manufacturing will decline double digit percentages by 2050. Investment in manufacturing expansion where there is strong labor force growth reduces competitive pressure for skilled labor and ensures labor availability in the long run.
Working-age population forecast for 2050 & working-age pop. growth compared to 2022
India workforces are growing but additional labor regulations must be considered. Indian workers are subject to multiple jurisdictions of labor regulations at the state and national level, and, because these regulations supersede any contract agreements, contracts require more scrutiny to ensure compliance.
India’s labor regulation environment is reminiscent of other major economies with its strong discrimination protections and leave requirements, but it has tighter regulations surrounding termination. When terminating employees, 30-90 days’ notice is typically required and large-scale terminations of more than 100 people require government approval in key sectors like manufacturing and agriculture. Furthermore, non-compete agreements cannot be enforced once an employee is terminated, limiting the IP protections that are typical in other regions.
A Footprint in India Unlocks Sales Channels to the Fastest Growing Major Economy
India is on track to be the 3rd largest economy in the world by 2030, but it has historically been a difficult market to enter. As the population and GDP continue to grow there is a unique opportunity to unlock a growing middle class. As seen following the manufacturing booms in China and Brazil, growth in manufacturing ripples across the economy, fostering a new middle class of consumers and invigorating the broader economy.
As businesses grow with this new customer base, supply chains will need to adjust to meet rising end market demand. Serving this customer base domestically reduces transportation and tariff costs, making products more accessible. This business model shifts operations out of China but retains access to other key markets within APAC, unlocking a new Indian market without impacting existing sales channels.
Beyond operational benefits, leveraging India for manufacturing unlocks the market by increasing local production content to be certified as a local supplier. Establishing manufacturing in India ensures a “Made In India” (MII) certification to satisfy local content requirements among other benefits. The latest revised Order 2017 reaffirms its original minimum 20% local content requirement for certification but now excludes transportation and other non-manufacturing costs in the local content calculation. These changes increase the need for manufacturing presence in India to retain certification.
Order 2017 further requires all companies participating in procurement bids for the Indian government to secure a MII certification. While MII certification is not required for private sector operations, it generates good will among potential customers and mitigates potential political risk from government leaders opposed to foreign businesses.
Conclusion
As companies consider de-risking their supply chain and moving operations out of China to other APAC countries, India should be considered among other regional players like Vietnam, Thailand, and Indonesia. India’s growing population is highly educated and has an appetite to become a new manufacturing powerhouse. Their national government has enabled this aspiration through programs to encourage FDI in manufacturing and investment in infrastructure required for a long future of operations.
The impact of India’s growing manufacturing sector will be felt across the economy as B2B businesses grow in parallel with consumer brands capitalizing on the new tastes of an emerging middle class.
“Companies will need to overcome a more challenging business environment than in other large economies.”
Entering India for operational benefits or as a new sales market is not without risk. Realizing the operational benefits of India’s investment and support structures will require companies to have the appetite to overcome a more challenging business environment than other large economies. Product archetypes (e.g., supply chain intensive, material intensive, labor-intensive, etc.) misaligned to the industry specific support structures and opportunities offered by the Indian market create new structural challenges rather than solving them.
Furthermore, products which may be best produced in India may not be ideal to also sell in India, so organizations should independently assess sales opportunities and their internal appetite to pursue those opportunities before investing.
Over the last several decades, India has pursued becoming a dynamic hub for global operations, and it has realized its multi-decade vision of being a more open economy. India is well on its way to becoming a regional manufacturing location of choice, but it has only started its journey to surpass international manufacturing juggernauts.