Tapping into the globally-competitive Indian manufacturing opportunity May 2020 Foreword The current global environment has several uncertainties. Global trade has been impacted by the COVID-19 crisis, with disruptions in supply chains highlighting the risk of being dependent on very few geographies. There is now a widespread emphasis by multinational companies on de-risking their supply chains and they are looking at diversifying to other countries. This report has been prepared to assist multinational companies in getting an understanding of the potential opportunities for them in considering India for manufacturing through collaborations with Indian companies and through contract manufacturing. Broadly, we see India as an attractive destination for MNCs around the world. To become a competitive manufacturing hub, India is expected to leverage its advantages such as, an existing strong manufacturing base, competitive labour and taxation, investor-friendly business regulations and upgradations in infrastructure. Another opportunity for MNCs in India is its large and growing domestic market which can absorb investments. We hope you find this analysis insightful. Sudhir H Kapadia National Tax Leader, EY India Contents 01 02 03 04 05 India as a Large and Engaging with Sectoral How EY can help competitive growing Governments to opportunities manufacturing consumption get necessary destination market policy support Executive summary Page 4 28 May 2020 Opportunities for multinational companies from India manufacturing partnerships - For Internal use only India can be a key manufacturing base for corporations relying on global value chains Large labour force ► Wages in India 30% of China One of the world’s fastest growing large economies ► 2.6 million STEM graduates – engineering talent (grown at over 7% in last few years) ► Labour laws being modified – flexibility for businesses to hire and fire Large market – Growing consumption in India Large tracts of land identified by Government – early ► 100% increase in household consumption over last start for manufacturing ten years Large tracts of land available in private run industrial ► US$ 150 billion of consumption added annually parks World class ports and airports located on global Stable external sector – Relatively stable Rupee, Large transport routes. Good hinterland connectivity through foreign exchange buffer, low crude oil prices rail and roads. Politically stable with good political and trade relations Excess electricity generation capacity with with leading markets around the world such as Japan, Government making efforts to rationalize tariffs i.e., US, China etc. reduce tariffs for electricity macroeconomic trends trends macroeconomic Growing economy with stable with stable economy Growing Key factor inputs factor Key Source: MOSPI; IMF 2020 (April) STEM: Scientific, Technology, Engineering and Management Page 5 28 May 2020 Opportunities for multinational companies from India manufacturing partnerships - For Internal use only Policy announcements announced in May 2020 underscore Indian Government’s focus on domestic manufacturing and opening new opportunities Expanding the role for private capital De-controlling agricultural sector Government has opened commercial coal mining and space sector for Government proposes to remove controls that would allow for a nation private participation. Further review of strategic sectors to be wide market for agricultural commodities, giving higher farm prices and undertaken with a potential privatization agenda. greater certainty to private players in sourcing agricultural produce. An efficient and competitive electricity sector Increased local defence manufacturing and aviation opportunities New reforms could potentially reduce power sector losses, bring more competitive power rates for the industry and increase efficiency and Recent policy changes intend to promote domestic defence competition in the power distribution segment. manufacturing and encourage MROs, that will boost both defence and civil aviation volumes. Opportunities in mining and healthcare sectors Continued commitment to foreign capital Government will take measures to create investment opportunities for Government’s announcement of increasing FDI limit in defence to 74% mining by auctioning licenses that would allow to go from exploration to and allowing Indian companies to list overseas underscores India’s deep mining, Government also proposes to increase public investment in commitment to foreign capital. health care facilities. MROs: Manufacture, repair and overhaul Page 6 28 May 2020 Opportunities for multinational companies from India manufacturing partnerships - For Internal use only India has undertaken several business friendly reforms in recent years 1. Through recent measures India’s taxation has become 2. Simple regulatory environment globally competitive ► 100% FDI investments in practically all manufacturing Corporate tax cut to 17%* to 10%** withholding tax for ► Free flow of goods in and out of country: simplified custom boost investment and dividend, long term capital procedures, major upgradation of port infrastructure transform India into a gains, royalty and fees for “manufacturing hub” technical service payments ► World Bank ease of doing business ranking up from 142 in Corporate tax in India is lower 2014 to 63 currently than other Asian countries 5%** withholding tax on interest payment ► Digital compliances for most tax and regulatory processes ► Massive scaled up digital payments infrastructure Transfer pricing provisions allow non residents to obtain Implementation of GST has 3. Various structural reforms to make Indian economy advance pricing brought in supply chain concluded or are underway efficiency and improved agreement or use safe competitiveness of India’s harbour rules to provide manufacturing sector ► Insolvency and Bankruptcy Code for easier exits certainty to foreign investors ► Decriminalization of Companies Act, 2013 ► Liberalization of regulations in: Agriculture, Power, Duty exemption on imports of inputs/capital goods in Aviation, Defence, Coal and mining manufacturing in bonded warehouse ► Government policies likely to favour locally produced goods Source: World Bank Ease of Doing Business Report 2019, Department for Promotion of Investment and Internal Trade FDI: Foreign Direct Investment *Corporate tax for new manufacturing companies; Subject to applicable regulations and rates GST: Goods and Services tax ** Subject to conditions under Indian tax laws and Double Taxation Avoidance Agreement between India and Japan Page 7 28 May 2020 Opportunities for multinational companies from India manufacturing partnerships - For Internal use only Various alternatives for leveraging India as a part of the supply chain Manufacturing 100% owned Contract through Joint Manufacturing Manufacturing Ventures ► FDI norms allow up to 100% ► Manufacturing in practically ► Vibrant private sector in India equity ownership in any sector can be undertaken ► Number of sectors are well practically all sectors through JVs developed with a host of well ► Numerous examples of global ► Vibrant and well established established players corporations running private sector – numerous ► Contract manufacturing used successful businesses without choices for JVs by a number of companies in any joint ventures ► History of long running and India successful joint ventures in India Source: EY Analysis JV: Joint Ventures Page 8 28 May 2020 Opportunities for multinational companies from India manufacturing partnerships - For Internal use only Key sectoral opportunities Sectors where India is competitive and has a manufacturing and export base Textiles & Consumer Auto Chemicals Iron, Steel & Pharmaceuticals Apparel Goods industrials components ► 6th largest in world ► 4th largest producer ► 4th largest sector of ► 2nd largest producer ► Globally, 3rd largest ► Projected to become of textiles Indian economy of Crude steel and in volume terms and 3rd largest ► Profitable with high Coal 10th in value terms manufacturer rates of return ► 6th largest exporter ► Increasing globally by 2025. for apparel globally consumption on the ► 3rd largest finished ► Attractive for ► Growing on the back back of large middle steel consumer in generic ► India has become a of demand for end ► Presence of entire consumer industries value chain in India class the world after manufacturing designing and China and USA. manufacturing hub ► Strong presence and ► Large producer of with increasing Cotton, Jute , ► Large resource of capabilities across Iron Ore the value chain presence of global Polyester, etc. OEMs ► Further liberalization ► Low cost of of the mining sector production ► Well developed auto- and coal sector in component exports ► Well versed with India getting FDA approvals Sources: EMIS sectoral reports, IBEF, Invest India, EY sectoral reports, Make in India, India Trade Portal, World Steel Association Report 2019 OEMs: Original Equipment Manufacturers FDA: Foods and Drugs Administration Page 9 28 May 2020 Opportunities for multinational companies from India manufacturing partnerships - For Internal use only Key sectoral opportunities New high growth sectors where export driven world class manufacturing facilities can be established in India Smartphones Defence Battery and Medical production manufacturing Electronics devices ► "Large market with ► Large buyer of ► Strong policy push ► Key focus area in a ~ 1.2 bn telecom defence equipment for Electric Vehicles post COVID World