BY: Siddharth Srivastava
With around$2.6 trillion in GDP, India is one of the world’s largest economy,yet manufacturing accounts for only 17 percent of the country’s GDP and only 2 percent of the world’s manufacturing output, a tenth of what its neighbour China contributes. Clearly, India is punching below its weight in manufacturing. Growth in manufacturing is crucial for India’s economic development. The manufacturing sector can propel India to become a robust middle-income economy by providing jobs to our young population, attain the technical know-hows, reduce dependency on imports and increase exports and thus reducing the trade imbalance and making Indian economy more interlinked with the global value chain. The government recognizes this and have undertaken various initiatives which include policy changes, tax benefits, production linked incentives etc. which through more targeted approach has potential to propel India as key manufacturing hub and increase the contribution of manufacturing segment in GDP to around 20% in this decade.
The manufacturing space in India was already showing some sign of improvement before pandemic struck. For instance,India was one of the few major economies to see acceleration in its manufacturing growth in five-year period just prior to the pandemic. Notably, India’s manufacturing Gross Value Added (GVA) grew faster than China’s in that period. India Manufacturing GVA grew by 7.1% vis-à-vis 5.9% of China and India’s share in global trade of manufactured goods also increased.
Indian government is also keen to walk the talk in this space though various initiatives. The government intent is to increase the production of manufacturing products in India, reduce the dependency on imports and integrate Indian manufacturing sector in global value chain. This perhaps require intent followed by more targeted actions. Recently, the government unveiled around Rs 2 trillion worth of Production linked Incentive (PLI) scheme for 13 sectors which is perhaps the most focussed attempt to increase manufacturing output in India. Largest beneficiaries under PLI will be segments like Electronic Goods, Automobile and Auto component, Pharma, Chemicals etc.The PLI scheme alone has potential to incentivize companies to incrementally produce around Rs 30 Tn worth of goods over next 5-7 years and thus become an important contributor to the GDP growth during this period. Apart from this, the government has also provided favourable tax environment, for instance, the corporate tax rate for new manufacturing units has been reduced to 15%, which is lower than several competing countries and comparable with China.The push from government under “AtmanirbharBharat” is also expected to propel industries like Defence manufacturing in India and promote import substitution.
The support from government along with favourable outlook for manufacturing sector currently, is something which investor should keep an eye on. For instance, automobile industry is now in the early stage of an upcycle given the looming large and suppressed replacement demand, continued buoyancy in the rural economy and a sequential improvement in financing. EV industry is at an inflection with favourable government policies and large investments to build the entire supply chain.The Pharma industry is expected to yield incremental production of more than USD 40 bn over five years. Chemical sector may benefit from shift to alternate supply sources outside china and import substitution opportunity to the tune of USD 11 bn which along with PLI will promote capex plans. China’s commitment towards decarbonization may keep supply and exports of metal and petrochemical from China under control which may support prices and margins outside China. Also, metal companies have deleveraged balance sheets to a sustainable level and with a stronger balance sheet and buoyant outlook on the cycle, the metal companies plan to increase capital expenditure in near future. Finally, Capital Goods sector is back to pre-COVID volume levels, after a decade long down cycle, deleveraging focus and capital squeeze, corporate commentary has turned bullish on private capex recovery.
The manufacturing segment thus right now provides exposure to companies which are catering to different set of opportunities, from expected recovery in auto to potential of electric vehicles, from the visible opportunities in pharma and steel to potential of defence and electronics. The space is brimming with potential. This along with the favourable outlook for manufacturing sector due to government initiatives, underlying demand and investment plans and improved balance sheet, makes a compelling case for manufacturing companies to form part of investor portfolio. Apart from the growth prospects, any investment into manufacturing will also aid in diversification from existing portfolio as typically investor portfolio or portfolio of mutual funds are dominated by companies from financial services, Consumption and Information Technology. Further, investor can also look at investing in manufacturing segment via active or passive fund,either from a long-termpoint of view, by making it part of their satellite portfolio, or as tactical allocation based on market opportunities. Hence as India seeks to grow its manufacturing segment in order create next phase of its growth story, investors should analyse this space for opportunities and may take exposure depending on his or her investment objective and risk profile.
Siddharth Srivastava. – Head – ETF products , Mirae Asset Investment Managers (India) Pvt. Ltd.
