‍ A New Chapter in India's Economic Story

India, once a country where farming ruled the roost, is now eyeing the throne as the world’s next big manufacturing powerhouse.
Post-independence, India had inherited a largely agrarian economy, and for the first 40-odd years of the existence of independent India, the agrarian dominance held with a smattering of industries and financial services – largely nationalized, showing fleeting but unrealized glimpses of the potential of India, beyond agriculture. Until 1990, agriculture accounted for 1/3rd of India’s $0.3Tn GDP, with government spending on public services accounting for another third, at about $10bn each. India’s manufacturing sector contributed less than $45 billion.

The 1991 reforms with market-friendly policies, reduced tariffs, and opening up of the economy was a watershed moment, spurring a tenfold increase in GDP to $3trillion over 30 years, non-incrementally driven by the triple engine of the IT sector, IT-enabled services (ITeS), and business process outsourcing (BPO)sectors. These sectors leveraged India’s young, skilled workforce, cost advantages, digital penetration, and government support, with services now contributing to over $2 trillion to India’s GDP.

Getting Ready for Indian Manufacturing’s Big Break

The next decade will be a giant leap forward in India’s economic development, and Indian manufacturing is poised to take a more central role. The know-how accrued & networks built by Indians worldwide are heralding a shift, as demand and venture capital grow eastwards. India’s goal is to shift from traditional heavy industries to more advanced, technology-driven manufacturing that can compete globally. In this quest, India can draw lessons from the OG Asian manufacturing stories of Japan and China.

Japan’s Edge: The Masterclass in Process & Innovation

Japan’s post-WWII economic miracle is like a masterclass in manufacturing. By 1968, Japan had risen from the ashes to become the world’s second-largest economy. Their strategy?

1. Talent and Process Excellence: Practices like Kaizen (continuous improvement) and Just-In-Time (JIT) production ensured their products were top-notch.

2. Technological Innovation: Japanese products were the envy of the world.

3. Government Support: Easy financing, skill development programs, and industrial clusters (Keiretsus) gave them a solid foundation.

The slowdown in Japan’s growth story highlights the importance of preparing for the aging of a young population and the perils of slow economic reforms. India will have to build to be future proof in these regards.

China’s Approach: Blockbuster Scale and Government Support

It’s no secret that China’s rapid ascent in manufacturing is a blockbuster case study. Initially focused on low-value manufacturing, China leaped forward as a manufacturing superpower as founders & business builders deployed a new playbook built on:

1. Government Support: Building manufacturing clusters and providing policy and financial support.

2. Cost Advantages: Cheap labour and raw materials.

3. Aggressive Pricing: Competing on price to gain market share.

With these fundamental building blocks, China’s contribution to the world gross production is now equivalent to that of all other G7 countries combined

While China's model brought tremendous growth, it highlighted the pitfalls of over-reliance on cost advantages and vulnerability to geopolitical tensions. India has the opportunity to balance these lessons by fostering innovation and quality alongside competitive pricing, and capitalize on the China + 1 motion that has gained steam post-covid.

The Perfect Blend for India’s Manufacturing Tech-ade

India is uniquely positioned to integrate the best practices from both Japan and China:

• Focus on Quality and Process Excellence: Emulate Japan’s commitment to high standards and process improvements.

• Scale and Government Support: Adopt China’s strategy of creating robust manufacturing clusters and ensuring strong government backing.

Four major tailwinds support India’s ability to transform into a manufacturing superpower and grow its share of the global market.

Growing Demand: Domestic & Global. "Make in India, sell in India, and to the world" has taken off in a big way. Indian companies are finding global buyers from consumer goods to space tech.

Reverse Brain Drain: As India strides towards development, a steady reverse migration of talent is underway. India’s global diaspora is bringing back global maxima of knowhow

Government Support: It’s easier to do business in India now, than ever before. Government support for emerging manufacturing with PLIs has spurred a huge opportunity in spaces like EVs, semiconductors and aerospace. Ambitious plans ahead.

Post-Covid China +1 re-allignment in supply chains: The disruption of global supply chains during the pandemic have led to India emerging as an alternative with comparable costs, labour, and talent availability. This has led to scaling capacity & capabilities in high-quality manufacturing.  

The Road Ahead: An Optimistic Future

India is on the cusp of a manufacturing renaissance. With traditional strengths, emerging sectors, government support, and world-class talent, India's manufacturing sector will boost the economy. The potential is immense, with manufacturing expected to contribute $2.5 trillion or more in the next decade.

We at Z47 (fka Matrix Partners India) believe that there is a very clear why now and a golden opportunity to create immense public value through manufacturing with startups at the forefront. Investing in India's manufacturing sector means backing a nation that is learning from the best and ready to compete at the highest level globally. At Z47, it’s lights, camera, and action on India’s manufacturing tech-ade.

Stay tuned for parts 2 and 3 of our series, where we will explore specific manufacturing opportunities and a venture capital perspective on what startups need to thrive in this sector.