After the smartphone sector, India’s toy industry can become a showpiece for Modi’s project of building a self-reliant India that manufactures for itself, and also for the world. That’s why the government has been on a relentless drive to nurture the toy industry. The latest step is its inclusion in the Production-Linked Incentive (PLI) scheme, a long-standing demand of the industry.
Modi has been waging a slow-burn war on China in a sector where China’s intrusion was quickest and most visible. The toy shops were one of the first sectors where cheap Chinese goods created a near-monopoly.
Turning around the toy trade
Modi had realised early that labour-intensive toy manufacturing which churns out cheap plastic and cloth toys is not as difficult to build up in India as electronics which requires inputs, raw material, tech and trained labour, all in short supply. That’s why Modi has been exhorting India’s toy makers to get ambitious. He has promoted the toy industry in his Mann Ki Baat radio broadcasts several times.
In less than a decade, Modi’s toy evangelism has shown results. India has begun to gain an edge. Chinese imports are shrinking and local manufacturing is revving up. Just five years ago, Sadar Bazar of Delhi, a big toy hub, was a veritable Chinese market because most of the toys were imported from China. Only 20% of the toys sold were made in the country. Of the rest, China had a 75% share. Now, Chinese labels are vanishing in Sadar Bazar. India was a net importer of toys until a few years ago. That has changed. Toy imports have fallen by 70% in the past three years, from $371 million in FY19 to $110 million in FY22. All this while, exports have increased by 61.38%, from $202 million in FY19 to $326 million in FY22, as per the Commerce Ministry.
How did India turn its toy trade around? In truth, India’s toy industry remains uncompetitive with that of China or Western countries. The toy export miracle is largely due to the government’s strong protectionist measures. On its own, India’s toy industry still can’t stand up to China. Also, India’s exports spurted when China’s giant industry was snoozing during the pandemic. But as the Chinese economy hobbles out of the pandemic slowdown, its manufacturing engine will roar back to life in a year or two. Can India keep resisting the imported Chinese toys?India’s turn to play
China had started out as the world’s factory by making small plastic goods and basic electronics. As it gained near-dominance in these sectors, whatever India had in the name of the toy industry was almost wiped out. In course of time, Chinese manufacturing got advanced enough to discourage domestic industry in any importing country to compete with it. In a labour-intensive sector which uses rudimentary electronics and cloth and plastic, India had a chance to excel. But before it could graduate from basic wooden and plastic toys, China had started flooding the Indian market. That ensured the Indian toy industry could not get organised or modernised enough to compete with Chinese imports. Labour laws, taxation issues, lack of technology and poor government incentives meant no major Indian industrial house ventured into the segment. Compared with China’s end-to-end, integrated manufacturing facilities, India’s small-size factories ensured there were no economies of scale.
At the Toycathon 2021, an initiative to crowd-source innovative toys and games ideas, PM Modi had said India’s share in the $100-billion global toy market was just $1.5 billion dollars, while China’s share is estimated at 55-70%.
India’s chance has come when the world is looking for alternatives to Chinese products, and India has come to have a huge domestic market and enough demand to support large-scale manufacturing of toys. About 25 percent of the Indian population falls into the 0-14 year category, which is an enormous customer segment, The Indian toys market was valued at $1.5 billion in 2022. According to a 2022 report by IMARC Group, it is expected to hit $3 billion by 2028, and grow at a compound annual growth rate of 12.5-13% over the next five years.
The government realised that there won’t be a better time to take a shot at domestic production, and it introduced muscular protectionist measures to save the domestic industry from cheap imports, thus creating the space for it to grow.
Winding up the toyconomy
In February 2020, the government raised import duty on toys from 20 per cent to 60 per cent. Now, it has gone up to a steep 70 per cent. High duty, which has ensured that Chinese imports make little business sense, created a space for Indian industry to grow and attain scale.
Another step that quelled imports was the quality control order, or QCO, the government issued in the same year it started raising duties. The QCO required toymakers, both domestic and foreign, to conform to India’s quality standards and bear the ISI mark. While the QCO has been issued to ensure that children are not exposed to sub-standard goods or those containing toxic material, it was also able to discourage Chinese imports which are usually of low quality.
“We have managed to create a demand for India-made toys in the market,” Vipin Nijhawan, Vice-President of the Toy Association of India, told ET recently. “The government has assisted the industry in several ways. It has not issued even a single BIS licence to any player in China, resulting in a significant fall in toy imports from there. We used to import 80% of toys earlier; it has come down to 10-20% now.”
The government informed in February this year that it has confiscated more than 30,000 substandard toys so far in the fiscal year. In a written reply to Rajya Sabha, Food and Consumer Affairs Minister Piyush Goyal said, “In order to curb the sale of non-ISI certified toys and to ensure implementation of Toys Quality Control Order, 2020, 100 search and seizure operations were carried out in the 2021-22 and 2022-23.”
The QCO also helped the Indian toy industry in an indirect manner. The highly fragmented sector has been dominated by extremely small units. Just 3% of the 4,000-odd manufacturers are large-scale players, according to a trade body. About 75% are micro units and 22% small and medium enterprises. Small units find it difficult to meet stringent quality standards set by the QCO. It’s not viable for small units to buy machines and equipment to ensure quality of production. The QCO might end up creating a highly organised and standardised toy industry in India for which it will be easier to create economies of scale as well as innovate to keep up with contemporary standards.
There are already signs of such an industry emerging in India. A toy hub at Koppal in Karnataka is trying to create an organised, end-to-end manufacturing ecosystem, just like those in China. Called Foxconn of the toy world, home-grown company Aequs has set up India’s first toy manufacturing cluster at Koppal in 400 acres at an investment of $500 million. Aequs, which has expertise in aerospace, is a contract manufacturer just like Foxconn, which makes iPhones for Apple Inc. Aequs caters to some of the largest North American and European toy brands. Six marquee toy manufacturers and suppliers have already signed up for setting up factories in the Koppal cluster.
To compete with China, the government is trying to create more such clusters where end-to-end manufacturing — from raw material to testing and packaging — is available. Two year ago, the government had approved three clusters in Madhya Pradesh, two in Rajasthan, and one each in Karnataka, Uttar Pradesh and Tamil Nadu under existing schemes. More such clusters are being approved where state as well as Central incentives are available to manufacturers. Now with the toy industry’s inclusion in the PLI scheme, the government hopes to attract big global players.
No child’s play to outdo China
With its focus on tech and its track record as a supplier to big global brands, Arqus is an outlier in the Indian toy industry. India would need many more Aequses to take on China. China’s toy-making ecosystem has developed over two decades and India can’t hope to compete with it in just a few years and with one Aequs.
A KPMG-Ficci report reveals India has to import most of the raw material and machines from China and other Asian countries to manufacture toys. Raw materials such as polymers, paper, board and non-toxic paints are sourced mostly from China, Hong Kong, Sri Lanka and Malaysia. Plastic- and rubber-moulding machines are sourced mostly from China and South Korea. Electronic components such as circuit boards, capacitors, motors, PCB and LEDs too are mostly imported from China, Taiwan and South Korea.
Both hair fiber and hair-rooting machines for doll manufacturing are again imported mostly from China and South Korea, as per the KPMG-Ficci report. India also lacks engineering for toy manufacturing such as 3D product prototyping, as it does certified testing facilities which help meet global quality standards.
Forget about high-tech machines and specialty raw material, India can’t make even a good-quality teddy bear with all of its own raw material. India has been importing from China even the cloth used to make plush toys.
A Toy Association of India official had pointed out two years ago that India’s lack of R&D, technology and innovation could stop it from achieving its big goals. We are building more manual and traditional toys even as they account for just 16% of total toy sales in the world. There’s no toy design institute, nor have our courses any industry interface. For an industry that thrives on innovation and caters to children with short attention spans, we need cutting-edge technology while harnessing our labour force advantage, he had said.
Ironic it may sound but it’s an undeniable reality that to create local manufacturing scale to take on China, India will have to depend on imports from China. It’s unreasonable to expect that India will first build its own raw material and intermediate goods industry. For example, a special non-toxic paint for toys which is imported from China can be manufactured locally when the industry scales up and there is enough local demand. Who will manufacture 3D product prototyping machines locally when 90% of the manufacturers are small units that can’t even afford quality testing? But once the industry scales up and there is large demand for such machines, someone will think of manufacturing them locally.
Local value-addition always follows the creation of adequate local scale. That’s why governments are urged not to impose import duties on intermediate goods and special raw materials at initial stages. Only after domestic manufacturing attains a critical mass, the government can think of discouraging import of intermediate goods and raw materials.
Walmart animates the toy sector
India’s toymakers have begun to get support from global buyers. US-based retail giant Walmart is looking to source toys from Indian suppliers. Walmart officials recently held a virtual meeting with several domestic toy manufacturers. Global retailers such as IKEA are already sourcing toys from India for their international operations. Global orders not just boost business but also help manufacturers develop technological prowess to meet global standards of quality as well as global fashion trends.
Several other global retailers from the US and Europe have also shown interest in sourcing goods from Indian toy manufacturers and hand-hold them to meet their compliance requirements, according to government officials. The Department for Promotion of Industry and Internal Trade is helping Indian manufacturers tie up with the global players to meet their compliance provisions.
Orders from the US and Europe are an indication that the developed world has begun to show confidence in Indian toymakers’ capacity to cater to their markets. R Jeswant, CEO of Funskool (India), a leading domestic toy maker, has even refuted the argument that India utterly lacks design and development capabilities of global standards. Pointing to rising toy exports, he said while talking to ET recently, “Had that been the case, why are so many international toy companies currently sourcing toys from Indian manufacturers today?”
Rome was not built in a day. Nor did China’s toy industry, with which Indian manufacturing is compared, come up in a few years. There are encouraging signs that India has begun to win Modi’s toy war on China. But it must remember that the harder it winds up its capabilities, the farther its toys will go.
