India’s aim of becoming a major global supply chain hub offers promising opportunities for investors seeking long-term growth. India does not need to be a “+1” for companies looking to reduce dependencies elsewhere. However, investors looking for opportunities in India should first thoroughly understand India’s core offering and define their guiding principles for investment accordingly.
Given the size of the market and the range of investment options, even for specialised organisations, the possibilities India offers can feel overwhelming. India accounts for about 4% of the world’s GDP, USD 100 trillion. However, the share of the country’s exports is 2%, and its share of the world’s total foreign direct investment (FDI) is a mere 1%.
This disparity highlights significant growth potential in a country aspiring to become part of the global supply chain and a major investor hub. The additional upside is that India could even become a major consumer market by itself (like China – but unlike Mexico, Poland and Vietnam).
International investors offer a roadmap for India to become less dependent on other countries for raw materials in electronics, pharmaceuticals, textiles and renewable industries through the vertically integrated model – such as that developed by Foxconn in China and replicated in India over the last decade. Indian manufacturing major, Tata Electronics, has already replicated this manufacturing model with early success.
Here is a brief overview of the current investment landscape in India.
India’s investment needs
Manufacturing is the path of least resistance for investors in India. Against a global appetite for value chain diversification, India’s government is positioning the country as a hub for specialised manufacturing sectors, offering incentives and committing investment into infrastructure. India has set an ambition to increase exports of goods by 1% annually for the next five years. This would entail increasing output by 9% every year. India cannot achieve these targets without a substantial inflow of foreign investments.
The government has earmarked 14 sectors for special support under the Production Linked Incentive (PLI) scheme. These products have a robust domestic market in India, but they also provide critical input materials for goods the country needs for greater self-reliance and bolstering its export credentials.
India as part of a coalition of global trading partners
India’s areas of alignment with global investors and nations are clear, as are the potential challenges investors face. India understands that to get a larger share of global trade, it must be more competitive and offer lower tariffs.
Imperatives created by Mr. Trump may drive trade reforms. Still, the upside for India may be exponential as it engages via the Quad and the Indo-Pacific Economic Framework for Prosperity (IPEF) to become part of a free and resilient international trading system – not just with the US, Japan, and Australia but with other Western democracies as well.
For investors, it is critical to understand the new areas of cooperation and partnership that India is entering into with its preferred partner nations – and to invest in securing incentives based on these agreements. There are significant niche areas within the manufacturing and services sector where such benefits can drive long-term value growth. Investors who come in with India-specific strategies will come out on top.
Exploiting niches: leveraging India’s export ambitions
The path to export substitution that powered the growth of Japan, Southeast Asian countries and China in the last 50 years will not work in India. Anticipating Trump’s second term, India has begun liberalising its protectionist foreign trade tariff regime.
Early success in the PLI scheme has been in niche manufacturing areas where India offers a domestic market and a viable export market. India's solar photovoltaic (PV) module manufacturing capacity has seen an impressive increase, driven by key policy interventions. The pharmaceuticals category has also seen large investment, particularly in areas where import dependence is high.
These success stories emphasise the need for investors to build strong stakeholder maps across all levels of government and industry India. Investors who “in-source” within the country and primarily manage their own logistics and supply chains will have the advantage.
Investing in upskilling, training and development of an India-based workforce
India is expected to have up to 1 billion working-age adults by 2030. Over the next five years, a quarter of the world's new workforce will originate in India. Yet, due to low-quality education, India suffers from a lack of employable graduates.
Collaborative initiatives between academia, government and industry (catalysed by investors) could help create a talent pipeline that bridges skill gaps and enhances workforce readiness. Some relevant programmes exist, but specialised areas like automation and data analytics for managing complex supply chains demand highly competent talent. Training Indian employees to be value-added contributors will be net-positive for global corporations.
Investors looking to employ Indian talent must invest in upskilling, training and development programmes that optimise the skills of a capable but unskilled workforce. They also must engage with central and state governments that offer incentives to encourage further education aimed at scaling up local talent. (Such programmes exist in Gujarat and Haryana already – with other specific programmes on offer.)
Anticipating a tough legal and regulatory business environment
The lack of speedy contract enforcement and dispute resolution has proven to be a dampener for many early investors in India. Despite the country’s overt commitment to a common-law-based legal and ethical framework and an unbiased judiciary, many investors struggle with managing their Indian investments. Moreover, despite broad political stability, India's federal structure forces investors to carefully navigate centre-state dynamics. A crawling pace of reforms also requires patience, especially in the era of coalition and compulsion driven politicking.
Investors looking for partners, on-the-ground investments and scaling their partner and vendor network must invest in pre-emptive diligence checks and define partner roles. Strict service level agreements, agreed-upon resolution mechanisms, management of escrow accounts with minimum guaranteed investments and regular review of progress against agreed parameters are also critical.
Over-indexing the manufacturing opportunity
India has emphasized service-led growth in the first 33 years of its reform era. However, the current administration knows that even though manufacturing remains a low contributor to GDP, the sector’s economic contribution is disproportionately high and requires concerted action to realise its potential.
The United States' example is instructive. Despite representing just 11% of the US economy, manufacturing accounts for 20% of capital investment, 35% of productivity growth, 60% of exports, and 70% of business R&D spending.
India needs to over-index on creating a robust and vital manufacturing sector to stay on the path to development committed under the India Vision 2047 promise.
There is decent early success to help affirm the virtue of this approach. In just four years, focused, value-added manufacturing subsidies (in the 14 sectors currently under the PLI scheme) have driven over USD 150 billion in production and USD 48 billion in exports from an outlay of USD 28 billion.
India offers investors an opportunity to reset global supply chains and make them multifaceted. India is investing in trade reform, policy changes, technological advancements and green initiatives to make this transition. India’s roadmap for sustainability (such as the 2030 goal of achieving 500 GW of renewable energy capacity) places India at the forefront of sustainable manufacturing.
India needs foreign investment to transform itself into a global hub for manufacturing and supply chains. By supporting this transition, investors will benefit from India's strengthening position in international trade while providing a global model for robust and sustainable supply chains.