Manufacturing Drives India's Economic Growth

India’s Gross Domestic Product (GDP) growth for the current year (April, 2007–March, 2008) is expected to be about 8.5 percent, while inflation is likely to be less than 5 percent, Reserve Bank of India (RBI) Governor Y V Reddy stated recently. Ensuring economic stability and keeping inflation in check were the highest priorities of the current macro-economic policy. “While there has been a significant increase in growth, our policies have emphasized stability,” Reddy said. “Global instability is a serious cause for concern.”

India is one of the few developing economies where inflation is under control, said Reddy. “Not many emerging market economies are without double-digit inflation.” Inflation had decreased from 9.6 percent in the 1990s to around 4.8 percent now.

While admitting that “we have some way to go to be in the company of some stable economies,” and that the RBI would like inflation to be below 3 percent, Reddy said that inflation is not a big risk in India. Giving credit to all his predecessors in the RBI and the policy makers in the Government, the Governor said that those in the Government never allowed inflation to go beyond 10 percent. For its part, the RBI “hates inflation.” Therefore, Indians have faith in the rupee.

Manufacturing growth

Driven by the growth of the manufacturing sector, the industrial growth rate in October grew by 11.8 percent, compared to 4.5 percent a year ago. That, in turn helps a robust economic growth. According to the Index of Industrial Production (IIP) released recently by the Indian government, the manufacturing sector saw an impressive growth rate of 13.3 percent during the month as against 3.8 percent during October 2006.

Meanwhile, the Indian manufacturing sector is estimated to command a market capitalization of $520 billion by 2014-15, as against $272 billion as of Sept. 30, 2007, said a study on the sector by the Confederation of Indian Industry and the Boston Consulting Group.

The core manufacturing sector comprises engineering and construction, industrial manufacturing, materials and commodities, chemicals and plastics, and automotive. The projection assumes that the ratio of market capitalization to manufacturing GDP remains at the current levels. “The sector thus has the potential to create additional shareholder wealth up to the extent of $250 billion by 2014-15,” the study says.

Internalization

Indian companies, the study points out, are also increasingly going through the process of “internationalization” through different models. The models include globalization of brands—as with Mahindra & Mahindra, which has emerged as one of the top five tractor manufacturers of the world—and market multiplication, as with companies such as VSNL and Reliance, which have made their global acquisitions.

Mergers and acquisitions are also transforming this sector. The total number and value of M&A deals in India across all segments have gone up from 200 and $7.1 billion in 2000 to 540 deals valued at $50.9 billion in the first half of 2007. “M&As in the manufacturing sector account for almost half of the overall deal value," according to the study. The M&As are an upshot of different strategic reasons—acquiring new capabilities, such as with L&T’s acquisition of Malaysia-based Tamco Holdings; improvement of market position, as with Crompton Greaves’ several mid-sized acquisitions in select market segments; and lowering of costs, as with Tata Chemical’s acquisition to gain access to low-cost raw materials source for its fertilizers.

About the Author
Uday Lal Pai,udaylalpai@gmail.comis a freelance journalist based in India.