India needs double-digit factory growth, Bank of America says

India will need to sharply accelerate manufacturing growth to meet its long-standing ambitions for the sector, according to Bank of America economists, who point to several constraints holding the country back from becoming a factory hub for the world.

BofA economists led by Rahul Bajoria estimate that India’s manufacturing sector will need to expand at an annual pace of at least 10% over the next 15 years to lift its share of the economy to 25%. That assumes overall gross domestic product growth of about 7% a year.

At that pace, India’s manufacturing sector could expand to almost $2.3 trillion by 2040, from about $500 billion in 2024, while its share of global manufacturing would more than double to 6.3%, they wrote in a research note Monday.

India’s economic trajectory has been unusual compared with many other developed nations. Services became the main growth engine before manufacturing developed into a major source of jobs, leaving a large share of the population still dependent on agriculture. Expanding manufacturing is seen as crucial to moving more workers from farms into better-paying jobs.

It’s also seen as critical Narendra Modi’s ‘Viksit Bharat’ ambition of turning India into a developed economy by 2047.

Modi has expressed confidence in India’s ability to reach the goal. Latest figures showed India’s economy expanded at a brisk 7.8% pace in the three months through June from a year earlier, beating expectations, with manufacturing growing 9.2%. In a celebratory tweet, Modi described the outcome as a “herculean feat.”

In its note on Monday, Bofa said India “perceivably punches below its weight” given its resources and workforce, while warning that “without substantially growing its manufacturing sector for both domestic consumption and exports, the prospects of Viksit Bharat by 2047 will be diminished.”

India has rolled out more than $26 billion of incentives over the past decade to attract manufacturers and build domestic supply chains. The push has helped draw companies including Apple Inc. and Samsung Electronics Co., and fueled a surge in iPhone production and exports.

Yet, “India’s manufacturing sector has broadly stagnated in its GDP share,” BofA said, at about 17%.

BofA identified regulatory burdens and high power costs as key constraints. India has 92.6 million micro enterprises but only about 40,000 medium-sized firms, a disparity that weighs on productivity and the creation of quality jobs.

Manufacturing MSMEs can face as many as 1,400 compliance obligations a year, making it harder for smaller firms to grow, they said. Industrial users also pay 10%-25% above the cost of electricity supply, compared with about 10% below cost in Vietnam.