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India’s manufacturing sector

India’s manufacturers have a golden chance to emerge from the shadow of the country’s services sector and seize more of the global market. McKinsey analysis finds that rising demand in India, together with the multinationals’ desire to diversify their production to include low-cost plants in countries other than China, could together help India’s manufacturing sector to grow sixfold by 2025, to $1 trillion, while creating up to 90 million domestic jobs.

Capturing this opportunity will require India’s manufacturers to improve their productivity dramatically—in some cases, by up to five times current levels. The country’s central and state governments can help by dismantling barriers in markets for land, labor, infrastructure, and some products (see sidebar, “Four imperatives for India’s government”). But the lion’s share of the improvement must come from India’s manufacturers themselves.

Recognizing this, a few leading ones are upgrading their competitiveness by bolstering their operations to improve the productivity of labor and capital, while launching targeted programs to train the plant operators, managers, maintenance engineers, and other professionals the country needs to reach its manufacturing potential. A closer look at the experiences of these companies offers lessons for other Indian manufacturers and for global product makers considering opportunities in India.

Made in India?

India’s manufacturers have long performed below their potential. Although the country’s manufacturing exports are growing (particularly in skill-intensive sectors such as auto components, engineered goods, generic pharmaceuticals, and small cars) its manufacturing sector generates just 16 percent of India’s GDP—much less than the 55 percent from services. Moreover, a majority of India’s largest manufacturers don’t return their cost of capital, a factor that dampens investment in the sector and makes it less attractive than its counterparts in competing economies, such as China and Thailand. Indeed, China’s manufacturers captured nearly 45 percent of the global growth in manufacturing exports from low-cost countries between 2001 and 2010, whereas India accounted for a paltry 5 percent.