Setting-up a Production Facility in India

/Setting-up a Production Facility in India
  • Production facility in India

Shavikesh Goel | Senior Project Manager | Maier+Vidorno

First published M+V INdia Insight in June 2009

India has been the flavor of the world for some time. With a large market for both consumer and industrial products, many international companies have started to look at how to participate in India. The possibilities range from establishing their own sales and marketing presence to having their own assembly or production facility in India. This is the first in a series of articles where we will shed light on the various aspects companies need to consider when setting-up a production line in India. In this introductory article we will provide an overview of the process when undertaking such a venture. Detailed preparation is essential to the realization of a production facility in India. However, there is always more than meets the eye. Preparation and planning will only take you so far. One needs to learn to be patient in India as the process is likely to take longer than elsewhere in the world. A number of factors need to be kept in mind. The most important and trickiest part of the whole process is the land; the search for and acquisition of it. The international company’s senior project manager needs to define the criteria (including the land size) necessary to select the best production location. A location analysis could be performed in India to determine the suitability of the land while a proposed production layout is done in parallel. Engaging a good project management company to coordinate the whole effort ensures that all aspects are followed and taken care of. It is the responsibility of the project management company to find the right partners like architects, engineering services companies, contractors, various vendors, etc. to ensure that the project is carried out professionally, smoothly and completed within the agreed budget and timelines.

Apart from having the right partners on your side, your company needs to be prepared for the entire approval process. This can take some time and normally runs concurrently with the project planning. The greater the number of government approvals needed, the longer the process will take. Once the approvals are obtained, local on-site building codes, bye-laws and other regulations must be strictly adhered to. The actual construction time can vary from 9 to 12 months depending on the size and scope of the project. International standards of quality are achievable however, only under the constant supervision of a competent and experienced project management company. It’s not unusual to hear of contractors cutting corners where they can. With a booming construction industry, the demand for able men and good quality construction material is increasing. This has caused the compensation packages and material costs to rise in step. However, the overall cost levels are still lower or comparable with other developed countries. Since Indian markets are growing fast, the break-even point can be achieved sooner rather than later. It is easy to see that search and acquisition of land can be the trickiest part. In this article we look at the process and issues of land search and its acquisition.

  • The key factors to consider before buying/leasing land in India are:
  • Nature of the land – government or private? Industrial or agriculture?
  • Ownership and history of the land – single or multiple owners? Clear title? Disputes? Court cases?
  • Methods to procure the land – first purchase? Re-sale?
  • Direct ownership or long-term lease?

There are two types of private land in India: a) industrial land – where the government grants permission to construct industrial units; b) agricultural land – where the government does not allow any industrial construction. Agricultural land needs to be converted to “non-agriculture” or “industrial” use by the government before any production facility in India can be developed. The process to do this can take a long time, and there is no guarantee that they will. You also need the right infrastructure to support a manufacturing facility, and this is an important point in the search for suitable land. Usually, land developed by the government is best since the infrastructure is provided; however, there are not so many such government developed industrial areas; and this makes private land an important alternative. Private land is more available but usually lacks basic amenities and infrastructure.

The government has declared some private land as industrial zones to respond to the vast demand for industrial sites; but these often lack sufficient infrastructure and cost more. Another critical issue is legal ownership. Even though India is almost the size of the European Union, land records and information on land availability is not fully organised. Title ownership and land history have to be clearly identified and approved, and this can be a time consuming endeavour. Also actual ownership will differ with the nature of the land. Private land can be bought outright; while government land can only be leased for a maximum of 95 to 99 years. You need to be clear if you are the first “allottee” or are in a re-sale arrangement where the existing leasee will transfer possession of the land via the government. The land purchase process will be much more streamlined when all the issues above have been clarified. However, it is always advisable to employ a local facilitator to ease the process and minimize the difficulties.