Can 'Make in India' become the driving force for commodities?

The introduction of sweeping reforms by India's National Democratic Alliance government since they came into power in 2014 has given a new momentum to India’s manufacturing sector.

Under its "Make in India" initiative, the government's ambitious target to raise the share of manufacturing in GDP from the current 16% to 25% by 2025 has indeed opened up a window of opportunity to push both domestic demand and export-led growth.

A series of new projects have been announced and implemented, helping to drive demand for resources, such as oil, coal, petrochemicals and metals.

This, the government hopes, will set the stage for sustainable long-term economic growth and create jobs for the millions of young people joining the workforce every year.

There are already signs of success.

Inflow of foreign direct investment increased by 60% in the 24-month period following the launch of the initiative.

In the commodities sector, major international companies, such as Shell, BP, Rosneft, Trafigura and Saudi Aramco, are expanding their presence in the country or considering joint ventures to explore production and trading opportunities.

Certain commodities, such as natural gas and new renewables technologies, appear set to benefit disproportionately from India’s push to simultaneously increase indigenous production, become a global manufacturing hub and lower its greenhouse gas emissions.

Strong economic growth, urbanization, rising income levels, and a rapid increase in the ratio of economically active people to dependents -- "the demographic dividend" -- will also drive demand for vehicles, petroleum products, high-grade steel and petrochemicals.

Not free of challenges

The country’s demand for energy and non-energy commodities has been forecast to outstrip its GDP growth. There is little prospect that domestic production of many primary and secondary commodities will keep pace.

Import gaps are a certainty. India will need partners, it will need reliable supply chains, and it will need foreign investment, if it is to grasp the opportunity that awaits.

The government must step up efforts to secure its long-term energy and resource needs. India is heavily dependent on many imported feedstocks and is vulnerable to external shocks and price fluctuations.

To strengthen its manufacturing base from 16% to 25% of the economy, India's manufacturing needs to be competitive, both internally and externally. India’s position in terms of competitiveness has improved sharply over the past two years, but a lot still needs to be done to close the gap with countries like China.

Still, a lack of infrastructure, inconsistent power supply, restrictive labor laws and burdensome bureaucracy are all challenges that need to be overcome.

At the same time, to expand its manufacturing sector, India's labor and capital must become more productive -- strong GDP growth means little, if it is based on population growth alone.

As India invites multinationals to set up manufacturing units in the country, it must ensure that the planned multi-billion-dollar improvements in infrastructure are delivered.

New Delhi must make sure that polices and the right infrastructure are in place to ensure that exports of finished products pick up as manufacturing activity rises. Without the right conditions in place, overseas companies will be reluctant to dive in.

The task is no doubt gigantic, but so is the gain. To achieve it, growth must be based on both the domestic market, which will require a broader distribution of income, and a more competitive economy that allows Indian manufacturers to expand their presence in foreign markets.

There are many reasons to be optimistic about the Indian growth story, as well as good grounds for caution. It is likely that India will realize at least in part its ambitions for its manufacturing sector.

It is likely that a combination of state and private capital will deliver the majority of the major infrastructural investments planned.

But the level of success, and thus the upturn in demand for commodities, depends ultimately on the continuation of the strong government policy initiatives that have been launched and implemented over the past two years.