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Make in India: Comparative Production Costs of Selected Indian States podcast

In light of India’s launch of the Make in India Initiative (MIII) aimed at transforming the country into a global manufacturing hub, and as Hong Kong companies increasingly eye production relocation or diversification due to rising mainland production costs, HKTDC Research undertook a fact finding trip to India to assess the country’s business environment, visiting several state capitals. Five states, Gujarat [1], Maharashtra [2], Andhra Pradesh, Tamil Nadu and Karnataka, were identified for comparison.

Although HKTDC Research also visited Delhi and nearby cities including Gurgaon and Noida, the National Capital Region (NCR) [3] was excluded in this analysis because of its rising costs for labour-intensive production. According to factory operators HKTDC Research met, manufacturers were increasingly relocating labour-intensive operations from the NCR to other states such as Maharashtra, Rajasthan and Gujarat to take advantage of lower production costs. The five states selected are identified as having the most potential for production relocation and diversification.

Labour

In South Asia, labour costs are generally lower than in Southeast Asia, although the latter has witnessed keener interest for relocation of factories from southern China. Nonetheless, India could become a strong contender for factory relocation given its multiple advantages: first and foremost, competitive labour costs that are expected to remain for some time. Currently, India’s labour costs are lower than those in China and almost all of the countries in Southeast Asia, with the exception of Myanmar.

Chart: Comparision of Monthly Minimum Wage in Selected Asian Countries
Chart: Comparision of Monthly Minimum Wage in Selected Asian Countries

India is a vast country in South Asia in terms of population and geographical area – the second-most-populated country, after China, with an area about one-third that of China. However, its per-capita income is about one-fifth of China’s, ensuring a good supply of low-cost labour for its manufacturing sector over the medium-to-long term. Labour supply in India is abundant in major manufacturing states selected for comparison in this article. Some Indian states have populations comparable to Southeast Asian countries, such as Myanmar and Vietnam. A booming Indian economy has helped create a strong demand for labour, with growing job opportunities in first- and second-tier Indian cities inducing persistent rural-to-urban and inter-state migration.

Chart: Population of Selected Indian States & SE Asian Countries
Chart: Population of Selected Indian States & SE Asian Countries

Cumbersome laws governing factory operations

In India, lots of manufacturing occurs in the informal sector, which typically covers cottage, household and village industries in areas such as handlooms, handicrafts and agriculture. Normally employing fewer than 10 workers, those informal units are not covered by the Factories Act and Shops and Establishment Act, nor do they attract the provisions of the Income Tax Act.

In comparison, manufacturing in a factory setting and employing more than 10 people pertains to the organised employment sector, which is governed by the minimum wage law. Minimum wage standards in India are complex. There is a national floor-level minimum daily wage applicable to all organised employment of 150 rupees, or about US$2.2. All major manufacturing states selected in this article have minimum wages set above the national level for all kinds of manufacturing jobs.

Complex minimum wage regimes across states

Each state in India has its own minimum wage standards and often has different rules for industry categorisation with various levels of complexity. Some states set daily minimum wages while others calculate them on a monthly basis, and most states have a complex system of minimum wage levels set for an industry by skill levels and zones within the state.

Minimum wage levels in India are regularly under revision. Reviews are carried out as frequently as every three months in Andhra Pradesh and Maharashtra. Gujarat reviews its minimum wages every six months, while Tamil Nadu generally adopts a yearly revision. Nonetheless, it is not surprising to find that reviews of minimum wages in various states are conducted at irregular intervals.

The tables below show the minimum wage levels for general factory employment, the electronics industry and the garment industry in the five selected states. Gujarat and Maharashtra generally have higher minimum wages. When comparing the minimum wages in India, the industry in question must be taken into consideration. For example, Maharashtra has a higher minimum wage standard in general, but the minimum wage levels of the state’s garment industry are lower compared with other states. 

Table: Monthly Minimum Wages of Selected States in India (US$)
Table: Monthly Minimum Wages of Selected States in India (US$)

Industrial Land Rates

All selected states have developed industrial parks for private investors to set up their production plants. The state governments or private companies provide infrastructure and amenities such as connecting roads, electricity, water supply, sewage-treatment facilities and communication networks.

Industrial development corporations set up by state governments are the main bodies in charge of developing and managing industrial parks. Generally, land is allotted on leasehold for 95-99 years in India, although freehold may be possible upon negotiation. Different sized allotments are provided to cater to the needs of small and large manufacturers. State governments often designate an entire industrial park to a specific type or group of manufacturers, as in the case of the Supa Parner Industrial Area in Maharashtra state that is designated for Japanese manufacturers.

While the majority of industrial park slots are developed by industrial development corporations, some involve partnerships with private developers. Embassy Industrial Parks and Mahindra World City are examples of private companies building and managing industrial parks.

An industrial park’s land rate is highly dependent on geographical location. Hong Kong companies considering factory relocation or diversification should take note of the substantial land rate differentials within a state, as land conditions could vary considerably in terms of proximity to state capitals, urban areas, major transportation facilities, amenities, etc. Slots at the low-price end are mostly greenfield sites with hardly any urban development nearby. At a glance, land rates in Maharashtra, Andhra Pradesh and Tamil Nadu are relatively higher, as they are the more developed industrial states with a higher level of foreign investment. The table below lists the land rates of major industrial areas in selected Indian states (with the bottom row featuring Vietnam for comparison, as it is a popular Southeast Asian country and has recently attracted a lot of interest in factory relocation and diversification).

Table: Land Rates of Industrial Parks in Selected Indian States
Table: Land Rates of Industrial Parks in Selected Indian States

Electricity Supply

Under-supply of electricity is a problem to industry but the situation in many Indian states has been improving. Western and southern states such as Gujarat, Andhra Pradesh and Tamil Nadu have energy surpluses, even though there could be sporadic energy deficits during peak hours. Notably, many industrial parks in India are inclined to market their 99% electricity-supply reliability.

Electricity tariffs in India have shown only mild increases since the sharp rise in 2013. Nonetheless, upward price pressure is expected to continue in light of the rapid increase in demand and cost recovery from large investments in electricity-generation infrastructure, where many projects are being undertaken by private energy companies. The table below shows the Wholesale Price Index of electricity in India.

Chart: Wholesale Price Index of India (WPI)
Chart: Wholesale Price Index of India (WPI)

Indian states adopt a cross-subsidy system, whereby industrial consumption subsidises agricultural and household consumers. Each state has multiple electricity suppliers providing electricity at different price ranges based on the level of consumption. Manufacturers usually fall into the categories of medium and high usage rates.

While charging higher fixed costs, Gujarat offers the most competitive per unit cost among the five selected manufacturing states. Tamil Nadu houses the largest number of factories in India yet its electricity costs are relatively high. Gujarat and Karnataka have more favourable electricity prices for manufacturers. The table below shows industrial electricity tariffs of the selected Indian states, with the bottom row showing Vietnam by way of comparison.

Table: Industrial Electricity Tariff of Indian States (July 2015)
Table: Industrial Electricity Tariff of Indian States (July 2015)

Price Level

India has been experiencing inflation at a decreasing rate and all selected states have followed this trend. The left-land scale of the figure below shows the general CPI trends of the selected Indian states in urban areas, while the inflation rate of respective states for the 2015-16 financial year is plotted against the right hand scale, with Andhra Pradesh showing the highest rate of about 7% compared to the national average of 4%.

Price levels in southern and eastern states including Andhra Pradesh, Tamil Nadu and Karnataka are higher in general, obviously implying higher operating costs for manufacturers. Maharashtra’s price level is relatively low compared with other states, despite it being the wealthiest state in India.

Chart: General CPI (Urban) of Selected Indian States
Chart: General CPI (Urban) of Selected Indian States

Transportation Logistics

Sea freight is an important consideration for manufacturers. The figure below offers an overview of the locations of major seaports in selected states, each with its own competitive edge and hinterland. Mundra in Gujarat is a port-based special economic zone, which offers a one-stop shop for export-oriented industries. Jawaharlal Nehru Port (JNPT) in Maharashtra is India’s largest port with hinterland covering Madhya Pradesh, Gujarat, Karnataka and most of North India. Visakhapatnam mainly serves northeast India, Chhattisgarh and Orissa. Chennai port is the major logistic hub of South India, supporting the vibrant manufacturing activities in Tamil Nadu. Mangalore in Karnataka serves a relatively small hinterland, mainly Kerala and Karnataka. 

Map: Major Ports of Selected Indian States
Map: Major Ports of Selected Indian States
Major Ports of Selected Indian States Map

The table below lists the average days required for shipping to Hong Kong, Shanghai and Rotterdam from major ports in the five selected states. To ship to Hong Kong and the Chinese mainland, JNPT, Visakhapatnam and Mangalore are the best locations in terms of shipping time. Mundra and Chennai are more suitable for shipping to Europe. The ideal production location may take into consideration the target sales market.

Table: Average Shipping Days to Selected Ports in the World
Table: Average Shipping Days to Selected Ports in the World

In terms of air freight, each state capital has one or more international airports supporting cross-border cargo transport. Mumbai’s Chhatrapati Shivaji International Airport in Maharashtra was top nationally in air-cargo freight before being overtaken by New Delhi in 2015, but it is still an important Indian air-freight hub.

It is worth highlighting that the logistics of Gujarat and Maharashtra will greatly benefit from the Delhi-Mumbai Industrial Corridor (DMIC) project, whereby a Dedicated Freight Corridor (DFC) will be built by 2019, greatly improving the speed and cost of land freight (by rail). Delhi, Ahmadabad (the capital of Gujarat) and Mumbai (the capital of Maharashtra) are major transport nodes along this corridor. The Dighi Port Investment Area in Maharashtra is a newly developed investment region serving as the DFC end point. It is expected that the logistics capacity of Gujarat and Maharashtra will be greatly enhanced in the coming years.

In announcing a memorandum of understanding (MOU) with Maharashtra to invest in new manufacturing facilities costing billions of US dollars, Taiwanese multinational electronics company Foxconn noted the state’s strength, including the presence of a financial centre, availability of quality talent and software-hardware integration facilities.

Map: Coverage of the DMIC
Map: Coverage of the DMIC
Coverage of the DMIC Map

Ease of Doing Business

India is famous for red tape and cumbersome regulations in doing business. Prime Minister Narendra Modi’s government is actively addressing this issue by undertaking a series of Ease of Doing Business (EODB) reforms in the country. In September 2015, the World Bank in conjunction with the Indian government assessed the progress of the implementation of EODB reforms in Indian states and ranked their respective performances. The table below shows the rankings of the five selected states.

Table: EODB Rankings of Selected Indian States
Table: EODB Rankings of Selected Indian States

Gujarat and Andhra Pradesh are identified as the EODB reform leaders, adopting many business-friendly measures to entice both local and foreign investment, while the other three states require further acceleration in reform. This explains why Gujarat and Andhra Pradesh are catching up with traditional manufacturing state Tamil Nadu in terms of the number of factories.

Furthermore, all five states have made notable efforts in tax reforms to streamline registration and payment of Value Added Tax (VAT) and Central Sales Tax (CST) through online services. Such reform has greatly improved the ease of doing business for SMEs. At the national level, the federal government is working to pass the Goods and Services Tax (GST) Bill to convert India into a unified market and prevent tax-on-tax.

Summary

This article provides an overall picture of the costs of production factors in five selected Indian states. To make the best decision on industrial locations, companies should also consider nominal costs, comparative strengths of a certain location and the specific industry involved. 


[1]  Make in India: The Gujarat Production Base Opportunity
[2]  Make in India: The Maharashtra Production Base Opportunity
[3]  The NCR is the designated metropolitan area in India encompassing the entire National Capital Territory (NCT) of Delhi, and the urban areas surrounding New Delhi in the neighboring states of Haryana, Uttar Pradesh and Rajasthan.

Content provided by Picture: Kenix Lee
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