A couple of decades ago, India was considered to be a third world country with limited economic potential.

When the idea of outsourcing first came up, most executives in the United States thought that Central American nations or Ireland would prove to be a better fit. However, two decades later, India is the ultimate destination for outsourcing software services as well as knowledge processes.

After having achieved dominance in the service sector, India is now looking towards becoming a global manufacturing hub. This intention has been made clear by the “Make in India” initiative that has been launched by Prime Minister Modi. As a part of this initiative, special concessions have been announced for multinational companies to create manufacturing bases in India. This has definitely drawn the attention of many American companies that are looking to reduce the dependence of their supply chain on China.

It would be inappropriate to say that within a short span of time India will compete with the likes of Japan, Germany, and China. However, the process for transforming the manufacturing sector has already begun.

In this article, we will have a closer look at the reason why India is poised to grow into a manufacturing hub as well some of the problems that it is likely to face during the journey.

Why Multinational Corporations Want to Relocate Manufacturing Operations in India?

• Large Consumer Market: India is home to over 1.4 billion people. These people have started to become affluent in recent years. Hence, there is an increasing demand for several products sold by foreign companies.

  Companies like Abbott pharmaceuticals have seen India become their third largest market in the world! This is also the case with other companies like Cummins Engineering which has seen a 15% growth in its operations for the past ten years that it has been in the nation.

  As disposable income grows, many multinationals want to sell their products to the Indian consumer. The most cost-effective way to do so is to start manufacturing in India. As a result, it is likely that the increased consumption will drive the growth of manufacturing operations in India.

• Politically Stable: Manufacturing facilities are huge and extremely cost intensive. Companies can shut down their offices and move to other locations overnight without causing too much financial distress. However, this is not the case with manufacturing facilities. The amount of money required to build such facilities is huge. Also, the gestation period to recover the investment is quite large.

  Companies would not want to build their facilities unless they are absolutely sure that their investment is secure. India has the upper hand on its rivals when it comes to security and stability.

  India is the most politically secure nation in the vicinity. Pakistan and Bangladesh are facing a problem with terrorism. On the other hand, China is known for being an oppressive regime. India is the most convenient option for corporations to invest their money in.

• Regional Export Hub: India has negotiated several trade agreements. As a result, it enjoys favorable deals from all its small neighbors as well as South East Asian countries. Hence, if a multinational company sets up it’s manufacturing in Mumbai, it can also serve other markets like Nepal, Bhutan, Bangladesh, Myanmar, Thailand, Malaysia and Indonesia, etc. At the present moment, some car manufacturing companies are even serving the European markets from their manufacturing facilities on the west coast of India.

The Problems with Manufacturing Sector in India

One of the most obvious problems with the manufacturing sector in India is that the infrastructure is not that well developed. As a result, the cost of manufacturing is very high as compared to global leaders like China. India has started working on that issue with great intensity. It is likely that within a few years, India will also have infrastructure as China does.

Some of the other problems with the manufacturing sector in India are as follows:

• Complex Land Acquisition Process: Multinational companies are viewed as foreigners. Governments are wary of giving them land or resources at concessional rates. This can be used against them politically even though they are working in the interest of the nation. Also, companies cannot acquire land directly without any government intervention.

  The law in India mandates that big companies can only build their facilities on land which has been acquired by the government. Also, since there is a huge black market in India, the market value of a property and its book value tend to be very different. This leads to exploitation of people during the land acquisition process.

• Labor Laws: Also, many companies are wary of moving their operations to India. American companies are used to hiring and firing companies as per their will. However, they cannot do this in India.

  The labor laws are very strict in India. Multinationals often find it difficult to comply with them laws. As a result, they end us leasing their workforce from temping agencies. However, temping also has limitations and in the absence of proper labor laws companies are unable to move their research departments to India.

To sum it up, it is likely that India’s manufacturing sector will grow by leaps and bounds. There are some challenges that will come up. However, they are not so severe that India Inc. cannot face them.