India's manufacturing sector faces significant challenges that will prevent it from reaching government targets and realising its economic potential, says a report.
"Weak infrastructure has long served as a drag on India's manufacturing performance. Inefficient national rail networks impede access to coal as well as the delivery of imported raw materials to inland factories," the report by BMI Research, a Fitch group company, said.
In addition, it said there is plenty of room for further improvement of India's energy grids and the expected time for a factory to access electricity has fallen since 2013, but remains high at 90 days.
"Apart from infrastructure, we expect India's manufacturing sector to face myriad regulations resulting in fragmented land and labour markets. Reforms have stalled in these areas partly due to the government's lack of majority in the upper house," it said.
Unless Prime Minister Narendra Modi's administration forms a consensus between diverse regional parties, land acquisition and hiring and firing processes for potential manufacturers are likely to remain complex and time-consuming, it said.
The regulatory burden, particularly in labour markets, will also partly offset India's cost competitiveness, it added.
Therefore, persistent bottlenecks to manufacturing investment will hold back the sector's expansion and impede catch-up with global manufacturing giants like China and Germany.
