Establishing a Manufacturing Business in India

Among the developing countries of the world, is generally accepted that China equates with manufacturing and India with services. Yet several leaders of the public and private sector in India see the country's road to riches leading through a manufacturing path.

India’s prominence in manufacturing, previously hampered by infrastructure needs, bureaucratic constraints and restrictive labor laws, has been slowly increasing. According to the Boston Consulting Group, in 2005 India’s manufacturing exports were 6 percent of GDP (US$37 billion) compared to 35 percent for China (US$712 billion).

A typical trajectory for emerging economies includes a transition from agriculture to low-end manufacturing to high-end manufacturing and services. India’s strong economic growth over the last decade has been primarily driven by the services sector, closely followed by the manufacturing sector. Many believe the next wave of growth in India will focus on manufacturing. The manufacturing sector is expected to drive India’s economy into the next decade and beyond.

India’s manufactured products are gaining wide acceptance within the global market, while strong domestic demand continues to drive manufacturing expansion. A study by the Confederation of Indian Industries and McKinsey & Co. on the manufacturing sector in India estimates that Indian manufacturing exports have the potential to reach US$300 billion by 2015, growing at an annual rate of 17 percent, compared to historic growth of 11 percent (last year’s growth was 12 percent).

"For India, manufacturing sector growth is very important,” Kamal Nath, the Indian commerce minister, told India Briefing in a recent interview. "We did 12 percent growth last year; we're doing about 8.5 percent growth this year." Nath went on to say that India could still distinguish itself by leveraging productivity instead of masses of unskilled labor. "India is emerging as a manufacturing hub, as an efficient technological manufacturing hub, not a mass-production hub," said Nath. "Mass production does not necessarily mean that it's employment-heavy. All manufacturing today has an information technology backup." That kind of manufacturing requires different types of infrastructure: transportation, energy and telecommunications, for starters. Nath said India's physical infrastructure was running behind its potential to grow, but he expected it to catch up within a few years.

There are several key factors contributing to India’s competitive advantage in the manufacturing sector: (i) a large domestic market; (ii) a strong engineering/managerial capability; (iii) infrastructure/ location advantage; (iv) government policies and regulations, (which focus on infrastructure, improving competitiveness of manufacturing firms, and attracting foreign investments in India (v) skilled labor, English-speaking, relatively low cost work force (one of lowest labor costs per hour in the world) - a necessity in the labor cost-intensive, heavy manufacturing sector; (vi) a rich reserve of raw materials; (vii) highly educated engineers and professionals – well developed, highly educated work force, competent senior managers (about 8 percent of the Indian population from ages 25-34 have attained at least some tertiary education); and (vii) well-developed designing and machining capabilities.

Multinationals are increasingly setting up manufacturing operations in India, driven by India’s strength in skilled labor, available at a relatively low cost, and a vast emerging domestic market. Ford, Hyundai and Suzuki all export a significant amount of cars from India. ABB, Schneider, Honeywell and Siemens have set up manufacturing plants for electrical and electronic products, both for domestic and export markets - Cummins, DaimlerChrysler, and Toyota Motor in auto components and engineering; and Degussa as well as Rohm and Hass in specialty chemicals.

The domestic manufacturing industry base in India in industries like pharmaceuticals, auto components, cars and motorcycles is especially robust.

There is enormous potential for investment in India right now. Before investing in India, there are some critical issues unique to the Indian economic, social and legal system that must be understood by any serious foreign investor.

The emergence of India’s free economy has involved huge internal realignments of Indian laws and businesses. As a result, the foreign investment regime often appears confusing to international investors. Further, India is burdened by an array of laws and regulations that impact the establishment and operation of a business. Therefore it is advisable to engage experienced legal counsel prior to investing in India.

The following seeks to offer a general outline for establishing a manufacturing business in India. Business law and policy is subject to change at any point, so investors are advised to retain counsel experienced in India transactions.

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