India’s natural resources and low-cost labour could spruce up manufacturing value chains if managed well.

While the world economy is hit hard by the Covid-19 pandemic, India could be sitting on a $300 billion opportunity and could actually double its manufacturing gross domestic product in the next few years.

According to a McKinsey report, while most companies and sectors in the manufacturing industry have not delivered strong returns on invested capital, there are as many as 11 manufacturing value chains, that can generate about $320 billion more in gross value added (GVA) than they do now within the next seven years.

McKinsey's analysis showed that about 700 top manufacturers generated returns that were even less than their cost of capital of 2028. “By contrast, the sectors that generated healthier returns saw increases in invested capital during the four years from 2016 to 2019,” the report said.

However, the report noted the six potential value chains, which can give a boost to the Indian manufacturing sector. These include, chemical products and petrochemicals, agriculture and food processing, electronics and semiconductors, capital goods and machine tools, iron ore and steel and automotive components and vehicles.

Further, it said that India’s natural resources and low-cost labour could spruce up manufacturing value chains if managed well.

“The country’s large numbers of well-trained workers lend strength to skill-intensive value chains such as pharmaceutical formulations, capital goods, and automotive components. And many manufacturing value chains in India operate in close proximity to strong domestic markets. The makers of fast-selling technology products, for example, enjoy ready access to millions of Indian consumers,” the report said.

In order to realize the potential, Indian manufacturers need to pursue these four opportunities, including the growth of domestic sales, export growth, import localization, and contracting manufacturing for global markets.

Further, the McKinsey report noted that to become globally competitive, India’s manufacturing value chains must lift their productivity—in GVA output per full-time-equivalent worker—closer to global standards.

“Improvements to key manufacturing processes could increase the productivity of Indian companies in the chosen value chains by a factor of five—with a tripling of labor productivity and a capital-productivity increase of one and a half to two times,” it said.

Besides, policy reforms could help create better infrastructure and logistics could also help Indian manufacturing become more productive, the report said.