CNBC's Inside India newsletter: Will India's lofty manufacturing ambitions bear fruit?

This report is from this week's CNBC's "Inside India" newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

The big story

India has long been thought of as the world's back-office, while its Asian counterpart China claimed the title of global factory powerhouse.

Those classifications held true for decades as India grew its capabilities in global command centers and other information technology services while China dominated large-scale manufacturing.

India's economic focus shifted to a new target when its government declared that manufacturing would spur its economy to high-income status by 2047.

The central government's launch of the "Make in India" initiative in September 2014 kicked off a move to galvanize efforts in becoming a manufacturing hub. Its intent was clear: to develop India's manufacturing capabilities in sectors like automotives, electronics, pharmaceuticals and aerospace while creating opportunities for locals.

In the 10 years since the launch of "Make in India," the government has dished out varied support measures such as the Production Linked Incentive Scheme, which supports businesses both local and foreign in planting roots in India. With an outlay of 1.97 trillion Indian rupees ($24 billion), 14 sectors are being leveraged under the PLI based on factors like their scope to reduce imports, boost exports and create employment.

From tech hub to iPhone manufacturer

To witness India's progress from a tech hub to a manufacturer, one merely needs to journey north from its own version of Silicon Valley in Bengaluru.

Approximately 65 kilometers (40 miles) northeast in the district of Kolar lies a Tata Group-owned facility that manufactures iPhones for tech giant Apple. The Tata Group became the first Indian company to manufacture iPhones after acquiring Taiwanese firm Wistron's operations last October.

Another iPhone facility will soon be 45 kilometers away from Bengaluru in Doddaballapura. Run by Foxconn, around 20 million iPhones are expected to be produced here annually, once it commences operations.

With 14% of iPhones being made in India, the nation is now the largest producer of the smartphone after China, according to Indian Prime Minister Narendra Modi. Apple has plans to raise this to 24% to 25% between 2027 and 2028.

Foxconn is among a growing number of contract manufacturers setting up shop in India to capitalize on its reservoir of workers seeking employment. The firm now has over 30 factories in India employing some 40,000 workers.

Like the Tata Group, other Indian firms have also jumped on the bandwagon. For instance, Dixon Technologies is among India's largest electronics manufacturers and has progressed from making gadgets like home appliances and surveillance systems for domestic consumption to producing smartphones for export.

Apart from electronics, India also has a foothold in pharmaceuticals and automotive manufacturing thanks in part to the "China Plus One" strategy that has nudged companies to diversify their supply chains and operations.

For instance, automaker Kia India set up its manufacturing facility in the district of Anantapur — over 200 kilometers away from Bengaluru — while homegrown company Divi's Laboratories is among the largest manufacturers of active pharmaceutical ingredients and counts global titans Novartis, GSK and Merck among its clients.

India's manufacturing sector has seen "remarkable" growth says, Samir Kapadia, founder and CEO of B2B marketplace India Index. For instance, it has benefitted from infrastructure developments like a six-fold increase in the pace of highway construction and a 40% jump in the average speed of freight trains over the past two decades, he said.

"These infrastructural shifts in India have improved connectivity within and outside the country putting India at a very different playing field than it was 10 years ago when 'Make in India' started," Kapadia told CNBC's Inside India.

He foresees further growth based on the $1.3 trillion earmarked by the government for infrastructure development for 25 years from 2021 to 2046, along with the partnerships and efforts that corporates are making.

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

For context, 61% of the 500 executive-level U.S. managers surveyed by market research firm OnePoll earlier this year said they would pick India over China if both countries could manufacture the same materials, while 56% preferred India to serve their supply chain needs within the next five years.

"What India will do is a lot more grandiose — I see a leapfrog in its entire workforce into industries like semiconductors, advanced manufacturing, aerospace and medical devices," Kapadia said.

India vs. other emerging markets

While India looks to poach China's manufacturing share, other countries like Indonesia, Vietnam, Bangladesh and Mexico are also stiff competitors.

Indonesia's manufacturing capabilities include nickel and battery materials, while Vietnam's comparative advantage lies in broadcast equipment and machinery, to name a few. Bangladesh has a strong share in textiles manufacturing while Mexico, which produces autos, aviation and aerospace equipment, has an edge over India given its proximity to the U.S.

Franklin Templeton's Yi Ping Liao, however, does not see major cause for concern.

"I think there's always going to be competition but each country will have its own niche," the assistant portfolio manager, who is part of the emerging markets equity Asia strategy team, told CNBC's Inside India.

What sets India apart is its lower cost of labor relative to the other markets, and the fact that capacity built there can address not just exports, but also its large domestic market which has huge consumption potential, Liao said.

"There are still a lot of challenges for India, but they're coming from a low base. So even if it grows its electronics manufacturing from 3% to 9% — that's a three-fold increase which is a good opportunity," she noted.

What's lacking?

Even as India embraces the maturation of its manufacturing industry, the sector still has a long runway before it can help the country realize its vision of becoming a developed nation.

"The policy intention and direction of Make in India is correct. But we haven't seen much of a change in terms of increasing the share of manufacturing in India's GDP, or in job creation," Shumita Deveshwar, chief India economist at TS Lombard, told Inside India.

In fact, the share of manufacturing in India's GDP dipped from around 18% in 2012 to 14% in the current fiscal year, recent data shows. Indian investment firm DSP Mutual Fund predicts that the sector's share in overall GDP will rise to 21% by 2034.

What is needed is an increase in India's competitiveness through the addition of jobs at higher skill levels, Deveshwar said.

For starters, this can be cultivated through vocational training for unskilled workers in areas like textile manufacturing which can "be a big provider of jobs," she said. More experienced employees can take on jobs in semiconductors and high value-added products "which require targeted skills," she noted.

India is also in need of foreign investments, which is at a five-year low, said Deveshwar. Foreign direct investments into India as a share of GDP have lagged behind Brazil and China between 2010 and 2022, which the TS Lombard economist finds concerning, given its strong macroeconomic indicators.

"We haven't really seen investment generation via FDI let alone in manufacturing. FDI flows are very much skewed towards services and the IT sector where India has had a historical advantage," she said.

"We have one or two big names coming in and making headlines but we're not seeing a large scale momentum pick up. I think that boils down to the structural fault lines like the need for better infrastructure which takes time to ramp up."

What is sure, though, is that India's manufacturing spurt should not be compared to China, Deveshwar said.

"Our ecosystems are very different. And so, India's manufacturing sector will grow and evolve at a pace different from China."

Need to know

India can achieve economic growth of up to 8%, RBI governor says. Shaktikanta Das told CNBC in an exclusive interview that he expects India's gross domestic product to hit 7.5% over the next few years, "with upside possibilities." His comments came after data showed India's gross domestic product slowed to 6.7% in the second quarter.

India's central bank chief plays down fears of a deposit crunch. Das also said the banking sector's slowdown in deposit growth is not a cause for concern currently, but "if it persists, then naturally the ability of the banks to continue their lending will get affected."

Big AI models will be commoditized, Infosys chair says. Speaking on CNBC's "Squawk Box Europe' Tuesday, Nandan Nilekani, co-founder of Infosys, said the value in AI will instead come from the applications that are built on top of these models. Watch the whole interview here.

Trump says he will meet Modi next week. Speaking at a townhall in Flint, Michigan, former U.S. President Donald Trump called Modi "fantastic" and said "he's coming to meet me next week." However, Trump also called India "a very big abuser" as he criticized several countries for their trade policies.

Amazon and Walmart's Flipkart reportedly violated Indian antitrust laws. An investigation by the Competition Commission of India found the two companies promoting certain sellers. Further, the report, seen by Reuters, accused five smartphones companies — Samsung, Xiaomi, Motorola, Realme and OnePlus — of colluding with Amazon and Flipkart to launch their phones on those platforms exclusively.

Nine stocks to cash in on India's growth. [subscriber content] Franklin Templeton's assistant portfolio manager of emerging markets equity Yi Ping Liao 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 Nifty 50 is now firmly above 25,000 points as the rate cut by the U.S. Federal helped the index to yet another record high. The index is up just 0.22% for the week but up 17% so far this year.

The benchmark 10-year Indian government bond yield ticked lower this week amid all the central bank news, hovering near 6.758% by Thursday afternoon.

On CNBC TV this week, Sanjiv Bajaj, the chairman of Bajaj Housing Finance, shared his thoughts on the property and home loan market in India and his outlook for the broader economy.

Meanwhile, the fundamentals of India's economy are strong, said Polka Mishra, partner at Javelin Wealth Management. However, "the big risk of India" is youth unemployment. "India needs to produce 12 to 15 million additional jobs a year" to combat youth unemployment, he said. The Indian economy currently adds 8 to 9 million jobs annually.

What's happening next week?

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