Manufacturing: An Investment Theme For The Next Decade

The manufacturing sector comprising industries that produce goods by processing raw materials or inputs into finished products plays a crucial role in India’s GDP (gross domestic product). It is one of the major contributors to the country’s economic growth and employment generation. In 2013, India’s manufacturing sector accounted for 14 per cent of the GDP. However, even eight years later (FY 2020-21), the manufacturing sector’s share in India’s GDP continued to hover around similar levels at 17.4 per cent. Till recently, most consumption depended on imports from China. Due to the unbeatably low rates of Chinese goods, manufacturing had become a pain point for India.

Thus, there was an acute need to address the challenge of the low share of manufacturing in India’s GDP. The manufacturing sector contributes to the country’s export earnings as well. India is known for its manufacturing capabilities in various sectors such as textiles, automobiles, pharmaceuticals and engineering goods. The country exports these products to various countries, thus contributing to the country’s foreign exchange reserves. As a means to improve the exports profile, the government has been consistently working towards improving factors like infrastructure, favourable government policies, increased foreign investment etc. to improve the exports profile.

By 2026, India is expected to double its manufacturing GDP to USD 1 trillion and over the next decade India aims to enhance the share of manufacturing in GDP to 25 per cent while also creating 100 million jobs. To make this a reality, the government is making a concentrated effort to revive manufacturing through various initiatives such as the ‘Make in India’ campaign, which aims to promote domestic manufacturing and attract foreign investment and the PLI (Production Linked Incentive) scheme. The government is also making policy changes such as raising import tariffs so as to ensure the local industry does not wilt under pressure from unfair competition coming from China.

Also, post-pandemic, many countries are considering supply chain de-risking by establishing collective supply chains, as a part of their overall China Plus One strategy in manufacturing and sourcing. China Plus One refers to a strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations. The driving factors range from China’s cost advantage diminishing in recent years to growing geopolitical distrust. India is looking to emerge as a key beneficiary by being a part of global value chains and reclaiming the market share lost to China and Vietnam over the years.

As a result of the measures initiated by the government over the past few years, India today has replaced Vietnam as the world’s second-largest mobile phone manufacturer. Another reason why the manufacturing sector is important is because this space remains a significant source of employment across the country. It provides direct and indirect employment opportunities to millions of people. The sector’s growth has led to the creation of various job opportunities, particularly in the small and medium-sized enterprises (SMEs). Another positive spin-off of improved manufacturing is higher capex. 

As India transitions from an agrarian economy to a manufacturing-oriented economy, the purchasing power of the people is likely to improve with time. This is likely to create a virtuous cycle of wealth creation, benefitting the overall economy. As a result, manufacturing as a theme looks poised to perform well over the next decade. In conclusion, the manufacturing sector plays a crucial role in India’s economic growth and development. Its contribution to GDP, employment generation and export earnings is significant. The government’s continued support and focus on the sector’s growth are expected to drive its contribution to the country’s economy in the coming years. 

A savvy investor looking to invest into these evolving opportunities from an investment perspective can consider investing in a manufacturing-oriented thematic fund. This is because manufacturing as a theme is not limited to a few sectors. There are a variety of sectors which come under this theme. Identifying these opportunities early on and staying invested in these will help multiply wealth over the long term. Since we are in the early days of creating a full-fledged manufacturing ecosystem in the country, an investor may consider staggering investments across the next few years. Hence, an SIP in a manufacturing-based thematic fund will be the optimal investment approach for the time being. Given the nature of the fund, patience is of essence as it may take a few years for the investment calls to play out.

The writer is Director - Intelli360 Asset Private Ltd n Email : koushik@intelli360.in