Why India’s manufacturing sector can compete with China’s

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Nov. 21 2019, Updated 3:11 p.m. ET

Advantage India

Wages in China are rising. It’s now up to the new government to undertake the necessary employment, education, and infrastructure regulation reforms to make India a labor-intensive manufacturing hub.

Advantage india

India offers potential investors in its manufacturing sector a number of competitive advantages:

  1. India’s own domestic market is large, with over 600 million rural consumers
  2. Workers’ wages in India are less than half of those in China
  3. India has a large talent pool from which to draw, including a strong engineering ecosystem

India’s competitive edge is not only in labor arbitrage but also in technologically intensive manufacturing. Innovation in manufacturing remains crucial to India.

Also, a number of foreign manufacturers have successfully overcome India’s infrastructure bottlenecks in the past:

  • LG uses India as an export hub
  • Hyundai’s small-car manufacturing base is in India
  • Nokia’s handset manufacturing factory in the southern state of Tamil Nadu costs 12% less than its counterpart in China

Opportunity for India

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While manufacturing in India has remained healthy due to strong domestic demand, its contribution to GDP is only 16%. In comparison, manufacturing contributes 34% to China’s GDP. According to global management consulting firm McKinsey and Company, there is potential for the sector to account for between 25% and 30% of the country’s GDP and create up to 90 million domestic jobs by 2025. India’s manufacturing sector could reach $1 trillion by 2025, the firm estimates.

Investors in the U.S. looking to profit from India’s growth can invest in ETFs (exchange-traded funds) such as the WisdomTree India Earnings Fund (EPI), the PowerShares India Portfolio (PIN), and the iShares MSCI India ETF (INDA). Emerging market such as the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets Index Fund (EEM) also invest in Indian equities.

Next, we’ll consider Narendra Modi’s “Zero defect, zero effect” slogan, and see if his manufacturing dream for India can be realized.

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