CNBC's Inside India newsletter: Will India's ambitious manufacturing goals succeed?

This report is from the CNBC "Inside India" newsletter, which provides timely and insightful news and market commentary on the emerging powerhouse and the big businesses driving its rapid growth. If you find it interesting, you can subscribe here.

The big story

For years, India has been viewed as the world's support center, while China has been recognized as the global manufacturing powerhouse in Asia.

For decades, India's classifications as a global command center and information technology services provider remained accurate, while China's dominance in large-scale manufacturing persisted.

The Indian government declared that manufacturing would be the key to achieving high-income status by 2047, shifting the country's economic focus to a new target.

The "Make in India" initiative launched by the central government in September 2014 aimed to boost India's manufacturing capabilities in sectors such as automotives, electronics, pharmaceuticals, and aerospace, while providing opportunities for locals.

Since the launch of "Make in India," the government has introduced various support measures, including the Production Linked Incentive Scheme, which supports both local and foreign businesses in establishing operations in India. With an investment of 1.97 trillion Indian rupees ($24 billion), 14 sectors are being supported under the PLI based on factors such as their potential to reduce imports, increase exports, and create employment.

From tech hub to iPhone manufacturer

Journeying north from Bengaluru, one can observe India's transformation from a tech hub to a manufacturer.

In the district of Kolar, approximately 65 kilometers (40 miles) northeast, is a Tata Group-owned facility that produces iPhones for a tech giant. Last October, Tata Group became the first Indian company to manufacture iPhones after acquiring the operations of a Taiwanese firm.

A new iPhone factory, operated by Foxconn, will be established 45 kilometers from Bengaluru in Doddaballapura. It is expected to produce approximately 20 million iPhones annually when it becomes operational.

India has become the largest producer of smartphones after China, with 14% of iPhones being made in the country, according to Indian Prime Minister Narendra Modi. Apple aims to increase this percentage to 24% to 25% between 2027 and 2028.

In India, Foxconn has established over 30 factories and employs approximately 40,000 workers, taking advantage of the country's large pool of job seekers.

Like the Tata Group, other Indian companies have also joined the trend. For example, Dell is one of India's largest electronics manufacturers and has shifted its focus from producing gadgets for domestic use to manufacturing smartphones for export.

India has a presence in pharmaceuticals and automotive manufacturing, in addition to electronics, due to the "China Plus One" strategy that encouraged companies to diversify their supply chains and operations.

Kia India established its manufacturing plant in Anantapur district, which is approximately 200 kilometers from Bengaluru, while the Indian company is one of the largest manufacturers of active pharmaceutical ingredients and has global giants such as Novartis, GSK, and Merck as clients.

According to Samir Kapadia, founder and CEO of B2B marketplace India Index, India's manufacturing sector has experienced "noteworthy" growth. He attributes this growth to infrastructure developments such as a six-fold increase in the pace of highway construction and a 40% increase in the average speed of freight trains over the past two decades.

According to Kapadia, the infrastructural changes in India have enhanced connectivity both domestically and internationally, positioning the country significantly differently from its state 10 years ago when the 'Make in India' initiative commenced.

The government's $1.3 trillion investment in infrastructure development from 2021 to 2046, along with corporate partnerships and initiatives, signals potential future expansion.

Kapadia added that what excites him more is the "incremental arbitrage India will gain as it takes market share from China inch by inch, sector by sector."

A market research firm surveyed 500 executive-level U.S. managers earlier this year and found that 61% of them would choose India over China if both countries could produce the same materials, while 56% preferred India to serve their supply chain needs within the next five years.

Kapadia stated that India's workforce will make a significant leap into advanced industries such as semiconductors, aerospace, and medical devices.

India vs. other emerging markets

India aims to capture China's manufacturing market, but faces competition from countries such as Indonesia, Vietnam, Bangladesh, and Mexico.

Nickel and battery materials are Indonesia's manufacturing capabilities, while Vietnam specializes in broadcast equipment and machinery. Textiles manufacturing is a strong suit for Bangladesh, and Mexico, which produces autos, aviation, and aerospace equipment, has an advantage due to its proximity to the U.S.

Yi Ping Liao of Franklin Templeton does not see any major cause for concern.

The assistant portfolio manager, part of the emerging markets equity Asia strategy team, stated on CNBC's Inside India that there will always be competition, but each country will have its unique niche.

Liao stated that India's lower cost of labor compared to other markets and its ability to address both exports and its large domestic market with high consumption potential are what distinguish it.

Despite the challenges that India faces, they are starting from a low base. Therefore, even if India's electronics manufacturing increases from 3% to 9%, which is a three-fold increase, it presents a good opportunity.

What's lacking?

Although India's manufacturing industry is maturing, it has a long way to go before it can contribute to the country's vision of becoming a developed nation.

While the policy direction of Make in India is appropriate, there has been little progress in increasing India's manufacturing GDP share and creating jobs, according to Shumita Deveshwar, chief India economist at TS Lombard, as stated in Inside India.

The share of manufacturing in India's GDP decreased from approximately 18% in 2012 to 14% in the current fiscal year, according to recent data. DSP Mutual Fund forecasts that the sector's share in overall GDP will increase to 21% by 2034.

Deveshwar stated that India needs to boost its competitiveness by creating more high-skilled jobs.

Vocational training can be used to cultivate skills for unskilled workers in textile manufacturing, which can provide many jobs. Experienced employees can also take on jobs in semiconductors and high value-added products, which require targeted skills.

India requires more foreign investments, as the inflow has decreased by 50% over the past five years, according to Deveshwar. Despite having robust macroeconomic indicators, India's foreign direct investments as a percentage of GDP have fallen behind Brazil and China between 2010 and 2022, as per TS Lombard economist's analysis.

India has historically had an advantage in the IT sector when it comes to FDI flows, with manufacturing investment generation via FDI being relatively unseen.

"Despite having a few prominent individuals making news, there isn't a significant increase in momentum. This could be due to underlying issues such as the requirement for improved infrastructure, which takes time to develop."

Deveshwar stated that it is certain that India's manufacturing growth should not be compared to China.

"India's manufacturing sector will develop at a different pace than China due to the distinctiveness of our ecosystems."

Need to know

According to RBI governor Shaktikanta Das, India can achieve economic growth of up to 8%, with the potential for even higher growth in the coming years. He expects India's GDP to hit 7.5% in the next few years, citing upside possibilities. His comments came after data showed India's GDP slowed to 6.7% in the second quarter.

The head of India's central bank has dismissed concerns about a deposit crunch, stating that the slowdown in deposit growth in the banking sector is not a cause for worry at present. However, he warned that if this trend continues, it may affect the banks' ability to continue lending.

Nandan Nilekani, co-founder of Infosys, stated on CNBC's "Squawk Box Europe" that the value in AI will come from the applications built on top of big AI models, rather than the models themselves being commoditized.

Trump announced that he will meet Modi next week during a townhall in Flint, Michigan. While praising Modi as "fantastic," Trump also criticized India for being a "very big abuser" in terms of trade policies.

The Competition Commission of India reportedly found that Amazon and Walmart's Flipkart violated Indian antitrust laws by promoting certain sellers. Additionally, a report seen by Reuters accused five smartphone companies of colluding with Amazon and Flipkart to launch their phones exclusively on those platforms.

Nine stocks to cash in on India's growth, according to Franklin Templeton's assistant portfolio manager of emerging markets equity Yi Ping Liao, who described India's market as "a fertile hunting ground to identify stocks," regardless of the companies' market capitalization. Here are the sectors in which she sees opportunities.

What happened in the markets?

The index has surpassed 25,000 points after the U.S. Federal cut the rate, resulting in another record high. Although the index has only increased by 0.22% this week, it has already gained 17% this year.

This week, the Indian government bond yield on the benchmark 10-year bond decreased, reaching 6.758% by Thursday afternoon, amidst the central bank news.

This week on Biz Focus Hub, Sanjiv Bajaj, the chairman of Bajaj Housing Finance, discussed his views on the property and home loan market in India and his predictions for the broader economy.

Polka Mishra, partner at Javelin Wealth Management, stated that while the fundamentals of India's economy are strong, the big risk is youth unemployment. To combat this issue, India needs to produce 12 to 15 million additional jobs annually, which is more than the current 8 to 9 million jobs added annually.

What's happening next week?

On Monday, Western Carriers India will debut on the Indian stock market, while Arkade Developers and Northern Arc Capital will list on Tuesday.