Make in India proposing the Maharashtra production base opportunity
As the top destination for foreign investment among Indian states, Maharashtra offers a favourable environment for Hong Kong manufacturers looking to relocate their labour-intensive factories
Following a multi-state field trip to India, HKTDC Research is rolling out a series of articles on the suitability of the South Asian country as an alternative production base for Hong Kong companies burdened by soaring production costs in Southern China. After publishing the articles Make in India: An Alternative Production Base with a Huge Local Market, which provided an overview of India’s manufacturing landscape, labour supply, infrastructure and related government policies, and Make in India: The Gujarat Production Base Opportunity, this article examines whether Maharashtra, one of India’s leading industrial states, could be a suitable destination for Hong Kong companies considering factory relocation. It looks at issues including Maharashtra’s economy, labour supply, government policies and infrastructure.
Maharashtra: an Economic Powerhouse of India with Mumbai as its State Capital
Maharashtra is situated in western and central India, overlooking the Arabian Sea with a coastline of nearly 720 kilometres. The state capital Mumbai is now the country’s financial and commercial hub. Mumbai’s role as a manufacturing centre has changed over time, with some low-value-added factories gradually spreading from the city to other parts of Maharashtra, such as Pune and Thane, because of escalating land and labour costs.
Maharashtra houses the largest container port in India, the Jawaharlal Nehru Port (JNP), located east of Mumbai – about 90 minutes’ drive from downtown. With its cargo hinterland spanning Maharashtra, Gujarat, Madhya Pradesh and Rajasthan, the port handles about 60 % of the country’s TEUs. JNP is also the terminal of the Dedicated Freight Corridor (DFC) of the Delhi Mumbai Industrial Corridor (See the section Well-developed Infrastructure of Maharashtra further below), an ambitious infrastructure and urbanisation project of India’s central and state governments, which will likely be completed by 2040.
Maharashtra is the Biggest Economy among Indian States
Maharashtra is the top Indian state in terms of gross state domestic product (GSDP) at constant prices, accounting for about 14 % of India’s GDP. The state’s annual GDP growth rate also the top nationally at 11.1 % on average between fiscal years 2004/05 and 2014/15. While Maharashtra’s economy is mostly oriented around services, which contributes about 55 % of the state’s GDP, the manufacturing sector remains important, contributing about 33 %.
Apart from being the largest economy among Indian states, Maharashtra is also the top exporting state, contributing about 23.9 % of India’s total exports. Major exports are gems and jewellery, textiles, ready-made garments, metal products, engineering items, plastic items, pharmaceutical products and software.
Maharashtra is also the top FDI Foreign Direct Investment destination in India, reporting a cumulative FDI of USD 78.3 billion as of December 2015, accounting for 28 % of the country’s inward FDI. While the US and Mauritius are among the major sources of FDI in the state, Maharashtra Industrial Development Corporation Limited (MIDC) told HKTDC Research that there had been growing interest from other parts of the world by manufacturers that were considering relocating to Maharashtra, and that the composition of FDI sources was likely to become more diversified.
Maharashtra’s Industry Development and Outlook
Maharashtra is a leading industrial state in India, its key industries including electronics, information technology, vehicle manufacturing and textiles. These industries are well-positioned to attract FDI. Maharashtra’s economy has great potential for further growth given the continuing synergy expected between its major industrial cities and Mumbai, the state capital which has long been India’s centre for financial and commercial activities. Meanwhile, Pune, Thane, Nagpur and Solapur are Maharashtra’s major business and industrial centres, with Pune and Solapur selected to be the pilots under the “Smart Cities Mission” to improve the state’s infrastructure and market viability. If effectively implemented, the initiative will further enhance Maharashtra’s industrial prowess and capability.
In turn, strong support is available in Mumbai to help foreign investors seek professional and financial services for their investments in the state. Needless to say, the state government actively courts FDI, offering strong support and facilitation services to prospective and existing investors (see the section immediately below Active State Support for Business in Maharashtra).
The figure below shows the major industries in Maharashtra, with industrial zones scattered across the state and highly concentrated in Mumbai, Navi Mumbai, Pune and Nagpur. The Supa Industrial Zone in Pune, which has housed 27 Japanese firms, showcases Maharashtra’s success in attracting FDI. The Shendra Bidkin Mega Industrial Parks and Dighi Ports Industrial Area are the two focused development areas under the Delhi Mumbai Industrial Corridor (DMIC) programme (see the section on DMIC further below).
Source Maharashtra Industrial Development Corporation
Furthermore, Maharashtra is a relatively wealthy state with per capita state income more than 50% higher than the national average (see Maharashtra’s Key Economic Figures above). Maharashtra itself represents a fast-growing market with strong local demand.
Active State Support for Business in Maharashtra
Known for its red tape and complicated bureaucratic procedures, India has been regarded by many international investors as a difficult place to start and maintain a business. This chronic image problem is well known to both the central and state governments.
In keeping with measures adopted by Gujarat under its chief minister Narendra Modi, now the country’s prime minister, to enhance governance and combat corruption, the Maharashtra government has progressively taken a number of initiatives; introducing reforms in business-register procedures and government-to-business services. The state has implemented a single-window clearance system to address all the issues involving the setting up of businesses. An eGovernance system has also been introduced to handle processes related to tax, water supply and other utilities, contract enforcement and procurement, areas that were typically prone to bribery and corruption.
Alongside the national “Make In India” Initiative (MIII) launched by Modi’s central government in September 2014, the Maharashtra state government introduced its “Make in Maharashtra” campaign to promote business development and attract FDI. In February 2016, Maharashtra hosted a week-long MIII Summit, in which it signed about 2,600 memorandums of understanding (MOUs) involving about USD 120 billion worth of pledged investment, including a USD 5 billion investment from Foxconn, the world’s largest electronics manufacturer.
The MIII aims to transform India into a global manufacturing hub by attracting foreign manufacturers to set up production bases in the country and encouraging domestic manufacturers to upgrade their production scale. Under this campaign, the Maharashtra state government aims to increase FDI and local investment in manufacturing by making business practices easier. The table below shows Maharashtra’s Rankings in Ease of Doing Business (EODB), with the state considered to be the best in India in enforcing contracts and obtaining infrastructure-related utilities.
The Maharashtra Industry, Trade and Investment Facilitation Cell (MAITRI) is tasked to serve as a single point of contact to handle all government-to-business services. Maharashtra is also one of the few states in India with specialised courts for handling commercial disputes.
Apart from administrative reforms and support, the state government also offers direct incentives to attract investment from manufacturers. Exemptions from stamp and electricity duties, subsidies on capital equipment for conserving water, and tax refunds on industrial promotion are provided. The 2016-2017 budget also introduces new tax norms for multinational companies (MNCs) in line with OECD guidelines.
Quality Supply of Labour in Maharashtra
Maharashtra is the second-most-populous state in India with a population approaching 120 million (comparable to Japan and more than Guangdong, China’s most-populous province), accounting for more than 9 % of India’s total population. Maharashtra’s population is higher than each of the 10 ASEAN countries except Indonesia, the world’s fourth-most-populated country.
According to Census 2011, the latest nationwide population survey that India has conducted, 60% of Maharashtra’s population was of working age (aged 15-49), providing an abundant supply of labour for manufacturing. With 45 % of the population living in urban areas, Maharashtra can ensure a good supply of young workers to fill its industrial parks. Being one of the richest states in India, Maharashtra also attracts millions of migrants from other Indian states who are an important source of manufacturing labour.
Maharashtra’s literary rate of 82.3 % is higher than the national average (73%), and the state has a good supply of well-educated labour for technician and engineering positions. Pune is developing itself into an IT hub with specialised education and research, providing strong support for the electronics, computer and machinery manufacturing industries in the city and the state.
Maharashtra’s labour costs are lower than those of China and most ASEAN countries. The monthly minimum wage for an unskilled garment worker in Maharashtra was about USD 95 in 2015. The chart below compares the monthly minimum wage of garments workers in Maharashtra with those in Asia’s major garment-exporting countries.
Maharashtra’s labour governance is considered to be relatively industry-friendly among Indian states. It has adopted self-certification for some labour laws to facilitate the ease of doing business. It is also the state with the lowest number of labour disputes in the country (see the chart below on labour disputes in major Indian states). Furthermore, the state government has introduced a number of labour reforms such as the relaxation of night-shift duty restriction for female factory workers and an increase in workers’ overtime limits. Nationally, the Modi government is moving to merge India’s hundreds of complex and convoluted labour laws into four comprehensive bills to simplify the country’s labour market in support of the MIII.
Well-developed Infrastructure of Maharashtra
With a long coastline and a central location, Maharashtra enjoys a geographical advantage with good connectivity to other parts of India and the rest of the world. Maharashtra has a well-established transport system supporting manufacturing activities. The state government is also progressively developing transport infrastructure, an overview of which is detailed in the table below.
Delhi Mumbai Industrial Corridor – a Game Changer for India
As well as the transport-infrastructure initiatives outlined above, Maharashtra is also undertaking various infrastructure projects aimed at furthering its industry capability. The Delhi Mumbai Industrial Corridor (DMIC) is by far India’s most ambitious infrastructure and industrial programme. Costing US$100 billion, it covers six states with an overall length of 1,483 kilometres, and is aimed at developing India into a “Global Manufacturing and Trading Hub”. The Dedicated Freight Corridor (DFC) is the backbone of the DMIC, aiming to significantly reduce logistics costs to strengthen India’s manufacturing competitive advantage. The DMIC is also expected to urbanise 12% of the Indian population over a period of 30 years.
The DMIC programme covers eight districts in Maharashtra and is expected to create 2.3 million manufacturing jobs. The development of Shendra Bidkin Mega Industrial Parks and Dighi Ports Industrial Area, as mentioned above, is already in progress, while the investment region in Igatpuri-Nashik-Sinnar and industrial area in Pune-Khed are earmarked for development. The Jawaharlal Nehru Port (JNP) in Maharashtra will serve as the DFC terminal with double-deck rail cargo carriage. In addition, the JNP-Vadodara leg of the DFC is expected to be completed in late 2019. JNP is also aggressively being expanded with the aim of doubling its capacity to 10 million TEUs and becoming one of the world’s top 10 container ports by 2020.
Electricity Supply a Bottleneck Being Tackled
Industry is the economic sector that consumes the largest amount of electricity in Maharashtra, and electricity supply could be a concern for manufacturers as the state has faced a power shortfall for many years. (In contrast, Gujarat to the north has an electricity surplus.) Nonetheless, the situation in Maharashtra is improving, thanks to state attempts to increase output and enhance generation and transmission efficiency, along with the development of new solar energy facilities to help accommodate the demand.
As a relatively well-developed state in India with quality and reasonably priced labour, well-developed infrastructure, supportive government policies, many industrial zones which are keen to attract FDI, and a large local market, Maharashtra is a good choice as a location for Hong Kong’s manufacturing companies to relocate their factories. The sizeable amount of FDI pledged in February 2016, when Maharashtra was hosting the MIII Summit, is indicative of the state’s strong appeal as an investment destination for international companies including many manufacturers.