India’s target of $7T economy to be driven by agriculture, manufacturing sectors: report

Over the next decade, India is expected to become a $7 trillion economy. Multiple factors will push this growth, but Digitising Make In India, a report by Matrix Partners India and McKinsey, says the development will be driven on the back of the manufacturing and agriculture sectors. 

In a conversation with YourStory Avnish Bajaj, Founder and Managing Partner, Matrix Partners India, and Sudipto Sannigraha, Principal, Matrix Partners India, decoded the report and revealed why they are bullish about these sectors as an early stage VC fund. 

Why manufacturing? 

“India is already a $3.5 trillion economy, with $500 billion manufacturing. Another $300 billion will be agriculture and there are multiple reasons why this will further double and grow. There is significant government push in terms of initiatives and policies.

"The budget had a push towards capex for the manufacturing sector. There's 100% FDI. In 11 sectors, and PLI schemes over $25 billion have been launched by the government to boost the economy across multiple sectors,” Sudipto says. 

According to Sudipto, there is a global push toward diversifying the supply chain to reduce reliance on China due to the current geopolitical environment. The Ukraine war has nudged companies to rethink their supply chains, not only in Eastern Europe but all of Europe. This means production will likely shift to Mexico, Turkey, India, and Southeast Asia. 

“India has a large geography, availability of raw materials, cheap labour, stable democracy, and government push – this makes it a lucrative location. A lot of global manufacturing and food will be produced in India and sent to the world, which is where this sector becomes super exciting,” Sudipto says. 

He added that the VC firm believes the manufacturing sector will alone add $1 trillion to the GDP in the next 10 years. And for that to happen, the 200 million SMEs and farmers will need good quality raw materials, both from India and the world, along with access to global markets. 

Companies will need access to financing so that they can fund their working capital and capex needs. They will also require software that helps them scale and present themselves globally. 

Sudipto explains all these are ways in which startups can work to ensure SMEs have higher productivity and increase access to markets. 

“If you look at all of these, there is a significant startup play,” he says. 

The duo said most of India’s manufacturing is run by SMEs. Southeast Asia, China, and Mexico have last factories, with faster automation for industry 4.0. In India, there are two segments. Sectors like automotive, oil and gas etc already have large economies of scale, with a lot of automation coming in. Smaller factories will leapfrog industry 4.0 and increasingly look at AI and Ml. 

Apart from the SME push, Matrix Partners India is also bullish about the EV market. The discovery of lithium reserves in Kashmir can translate into a significant push for the EV market.

According to the report, gross value added (GVA) and exports have grown at a CAGR of 3.7% and 8% respectively over the last five years. Government schemes (PLIs, NIMZs) helped promote manufacturing, logistics infrastructure, export demand rose, and industry 4.0 applications saw adoption. 

The industry continues to face challenges in the form of volatility in input prices, shortage of skilled labour, low-capacity utilisation, complex export procedures, and lack of access to international demand.

 Key factors in manufacturing

* 68% survey respondents expect Indian merchandise exports to grow at more than 10% p.a. over the next five years

• Survey respondents feel electronics & semiconductor (78%), auto & auto components (45%), and pharma (42%) will be the top three sunshine sectors driving India’s growth 
• For early-stage startups, survey respondents believe there are clear opportunities in

1. Marketplace for sourcing raw materials (53%)
2. Software for factories (63%)
3. Vertically integrated global marketplaces (48%)

• Government initiatives 

1. 35% of respondents feel that “cross-border trade agreements” is where government incentives have helped the most 
2. 43% feel “simplifying custom clearances” is where they can get support

The agriculture push

The fund is backing the agriculture sector, but believes that it needs to grow vertically.  

Agricultural productivity is rising, and so is consumer demand for healthy foods. According to the report, GVA and exports have grown at a CAGR of 8% and 7.5% CAGR respectively over the last five years. 

Many startups are actually focusing on providing access to farmers. 

“Step one is to create this demand pipeline so that farmers actually sell it to you. Step two, which is critical and still not happening in India, is once you buy 100% of the produce from the farmer, you tell them how to improve farm productivity. But that happens when you completely solve for demand, and this is where agriculture will open up,” Sudipto says. 

Challenges for the sector include lack of financing to farmers, limited awareness about quality inputs, unscientific and unsustainable farming practices, limited farm mechanisation, and high wastage in the supply chain. 

Key factors in agriculture

• 64% of respondents believe global demand supply imbalances to be the major driver of export growth 
• For early-stage startups, survey respondents believe there are clear opportunities in

1. Fully integrated B2B/B2C for quality agri inputs (57%)
2. Hardware-based precision farming (50%)
3. Tech to efficiently map demand and supply (57%)

• Government initiatives 

1. 43% of respondents feel that “supporting FPOs in creating infra for sorting and grading” is where government incentives have helped the most 

“The next 10 years, if I look at the macro sector, there will be large companies which take a lion's share of the market. These could be startups and incumbents. We believe that startups can add a lot of value, which is where we are bullish. You can't control the market, but in the long term we believe in the market,” Sudipto says. 

Avnish says India is in the process of becoming a manufacturing powerhouse - one that is digitally led.

"We are all privileged to have a ringside view to this once-in-a-lifetime development for a country. We are excited to invest in B2B and agri digital businesses and partnering with outstanding founders in this sector,” Avnish concludes.