Setting up a New Manufacturing Plant in India: Complete Guide

Setting up a manufacturing plant in India requires meticulous planning to ensure long-term success. Maximizing efficiency and safety from the outset is crucial for cost reduction. While India's rapid economic growth offers opportunities, navigating regulations and cultural nuances demands strategic foresight. This article delves into the fundamental steps and crucial insights essential for the successful setting up of a manufacturing plant in India, covering aspects from comprehending regulatory frameworks to tapping into the advantages offered in India. This guide seeks to empower entrepreneurs with the expertise and resources necessary for flourishing in India's vibrant manufacturing industry.

What are the advantages of setting up a manufacturing plant in India?

Setting up a manufacturing plant in India has its own plethora of advantages apart from the central and state incentive schemes elaborated below. India, being an emerging global economy, serves as a regional distribution hub with strategic maritime routes connecting various other countries, like Middle East, Japan, etc. Notably cities like Ahmedabad, Mumbai, Chennai, and Kolkata holds significant EXIM potential supported by over 200+ major and minor ports along its 7500+ km long coastline.[1] Being the 6^th largest consumer market globally and having 31% urban consumers, India offers vast consumer potential.[2] Setting up a manufacturing plant in India would provide rapid nationwide distribution only in 12 hours from 8 cities.[3] Reduced logistical costs attributable to improved infrastructure due to a $1.4 trillion investment in infrastructure along with India being the world’s 2nd largest roadway and 4^th largest railway network.[4] Manufacturing plants would have access to a young and skilled labour force. Lastly, as India is continuously evolving, there is an increasing adaptation of information technology through several initiatives such as the ‘Digital India’ and ‘Make in India’. 

What are the key sectors to set up a manufacturing plant in India?

During the financial year 2022-23, the total foreign direct investment (“FDI”) inflows in the country estimated to about $70.97 billion registering a 100% increase in the last 9 financial years.[5] Such an increase in FDI can be attributed to a focus on India’s expanding manufacturing sector, India is now among the top 10 countries with the highest industrial output and in the Top 3 greenfield FDI destinations.[6]

As a part of the manufacturing sector, the major industries attracting the highest FDIs during the financial year 2015-19, were the following; information technology, building and infrastructure, transportation, chemicals (other than fertilizers), pharmaceuticals, telecommunications, electricity, electrical equipment, lodging and tourism, PC hardware & software and non-conventional energy.[7]

What is the Procedure to set up a manufacturing plant in India?

Upon assessment of market viability, the range of products, the target customer base and other aspects of the business operation, the following key parameters shall be required to be taken into consideration before undertaking the process of establishing a manufacturing plant in India: 

Establishing a presence in India

In order to establish a manufacturing plant in India, any entity, be it domestic or foreign, will be required to establish its physical presence in India. The same may be done either by incorporating a partnership firm (including a limited liability partnership) or a company in accordance with the applicable laws of India. In furtherance of the aforementioned, if a foreign entity opts to set up its presence in India, the foreign entity will have to undertake the requisite compliances under the Foreign Exchange Management Act, 1999 and the rules and policies framed thereunder in its entirety. The foreign entity may either choose to acquire an existing entity or incorporate a fresh entity and establish its wholly-owned subsidiary in India. However, the same will be subject to the foreign direct investment policies as the compliances required to be undertaken are sector-specific and therefore, plays an important role in deciding the quantum of inflow of funds and the approvals required to be undertaken thereby determining the feasibility of the operation of the said manufacturing plant in India. Further, the foreign entity can also enter into a joint venture arrangement with one or more Indian partners/companies who would then form a new entity in India. Establishing its presence in India through a joint venture arrangement would have several benefits for the foreign entity as the Indian entities would have an already established distribution, and marketing set-up along with several connections in the Indian markets which would ease the process of setting up a manufacturing plant in India and conducting business. 

Identifying Location & Land

Apart from undertaking the incorporation process, the entity intending to establish a manufacturing plant must make an informed decision with respect to the location in which the said plant is intended to be established. The crucial factors that must be taken into consideration before identifying the location of the manufacturing plant are proximity to materials, transportation & infrastructure costs, availability of skilled and unskilled labour, access to the target markets, supply chains, etc. Further, as state governments offer varying incentives based on the nature of the industry, it is essential for businesses to identify and determine an area in accordance with the identified industry in order to maximise the incentives offered in such identified state. Further, with the introduction of the Special Economic Zone Act, 2005, the government has established special geographical areas which offer multiple benefits to the manufacturing plants.

Upon determining the location of the manufacturing plant, the entity must also determine whether it would be willing to undertake the construction of a new facility or plant on an unused land (generally referred to as “greenfield projects”) or it would like to initiate the project on a pre-existing facility (generally referred to as “brownfield projects”). Depending on the risk appetite, time and costs related to a project, the entity may align its objectives and opt for either greenfield projects or brownfield projects.

Registration Process, Licenses and Compliances

Upon completion of the incorporation process and identification of a suitable location to setup the manufacturing plant in India, the entity would also require to on board certain workers and employees who will be responsible for the operation of the manufacturing plant. In case there are 10 or more workers working with the aid of power or 20 or more workers working without the aid of power, and are involved in a manufacturing plant, on any day of the preceding 12 months, such manufacturing plant would be mandated to obtain a registration under the Factories Act, 1948 (“Factories Act”).

In order to obtain a registration under the Factories Act, certain pre-requisites shall be required to be fulfilled by the entity which include the following i.e., registration of the proposed building plan as the same is mandatorily required prior to commencing manufacturing activities, compliance with the safety and welfare measures, procurement of a non-objection certificate from several departments such as the fire, water and pollution department in order to seek environmental compliances, formulate and submit a detailed factory plan which shall incorporate details pertaining to machinery and send a notice to the chief inspector approximately 15 (fifteen) days prior to commencing their manufacturing activities.

In furtherance of the aforementioned pre-requisites, manufacturing plants catering to certain industries such as pharmaceuticals or drugs, would require certain additional pre-requisites as per the requirement of the industry.

Upon fulfilment of the prerequisites, a manufacturing plant can apply for registration under the Factories Act, wherein such registration is permitted to be made online with the respective state government. The timeline and approvals to obtain the registration vary by state and depend on the nature of the manufacturing plant.

Once the manufacturing plant obtains a registration under the Factories Act; the manufacturing plant would have to obtain and fulfil certain additional registration and compliances. The additional registration and compliance to be obtained are as follows:

Labour Law Compliances

As a manufacturing plant in India may employ several workers and employees ranging from unskilled to semi-skilled to skilled workers, the manufacturing plant would have to adhere to the labour laws in India and its compliance requirements. The compliance and registration requirements would be in relation to including but not limited the (i) Employee’s Provident Fund scheme, (ii) Minimum Wages Act, (iii) Payment of Bonus Act, (iv) Maternity Benefits, (v) Industrial Disputes Act and (vi) Employee’s State Insurance scheme. Such labour law registrations and compliances are imperative as they encompass various facets like, minimum wage standards, prescribed working hours, overtime regulations, as well as ensuring the safety, health, and welfare of the workers employed at the manufacturing plant.

Import Export Code (IEC)

If a manufacturing plant is involved in the export and import of goods, such manufacturing plants are required to obtain an IEC. The IEC is issued by the Director General of Foreign Trade (DGFT). This 10-digit code is valid for a lifetime. Importer merchants cannot import goods without the IEC, and similarly, exporters cannot avail benefits from DGFT export schemes without it.

Environmental Clearances and Consents

Manufacturing plants set up in India must adhere to a range of environmental laws aimed at safeguarding the environment and fostering sustainable growth. Among these regulations, obtaining consent from the central and state Pollution Control Board (PCB) is an essential requirement. This consent guarantees that manufacturing operations prioritize environmental friendliness and refrain from causing any harm to the ecosystem.

Industry-specific registrations and compliances

Similar to the additional pre-requisites required in order to obtain a registration under the Factories Act, certain manufacturing plants catering to specific industries would require certain specific and additional registrations and compliances. Herein, the manufacturing plants in such industries would have to adhere to the requirements of their respective sectoral regulators.

What are the different Government Schemes helping to set up manufacturing plants in India?

In India, manufacturing plants receive incentives through a two-tier incentive mechanism wherein incentives are provided by the central government as well as the respective state government where the manufacturing plant is set up. State governments offer several incentives to manufacturing plants, which may either be provided through a scheme for example the IT/ITeS policy scheme implemented by the government of Gujarat or on account of the manufacturing plant being set up in a special zone such as SEZ, IFSC, DTA, etc.

The central government has the power to establish IFSC’s and have recently established India’s first IFSC in GIFT City, Gujarat, India. The IFSC offers manufacturing plants with several incentives such as exemptions on income tax, GST and other applicable duties and concessions on expenses like electricity and labour costs along with providing an already established infrastructural set up, internal roadways, water, and electricity connections.

The department of Pharmaceuticals, in order to incentivize manufacturing of pharmaceuticals implemented three schemes aimed at incentivizing global as well as local players to invest in the industry. The three schemes are (i) production linked incentive scheme for bulk drugs, (ii) production linked incentive scheme for pharmaceuticals and (iii) scheme for bulk drug parks.

Conclusion

Setting up a manufacturing plant in India offers a promising prospect for companies aiming for expansion. Utilizing the detailed guide offered, entrepreneurs can confidently navigate the complex legal, regulatory, and logistical structures. India is a growing market with a skilled labour pool along with governmental support make it an ideal investment destination for manufacturing. Embracing this resource provides businesses with the expertise and resources needed to embark on a successful path toward establishing a prosperous manufacturing presence in India's vibrant and progressing economic culture.

[1] https://static.investindia.gov.in/s3fs-public/2020-05/Advantage%20India_4.pdf

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] https://www.investindia.gov.in/foreign-direct-investment

[6] https://static.investindia.gov.in/s3fs-public/2020-06/Pan%20India.pdf

[7] Ibid.