The Narendra Modi-led government is pegging India as a manufacturing hub, and global firms are interested. But policy and infrastructure groundwork to see such lofty plans through are still lacking.
Progress is hard for Make in India
In a vast factory in Sriperumbudur, an Indian city about 40 kilometres south-west of Chennai, hundreds of workers are industriously labouring to churn out millions of 4G Moto E smartphones a year.
The Chinese technology company Lenovo, which acquired Motorola last year, three weeks ago started manufacturing smartphones in India. It is the company’s only manufacturing facility outside of China where it is making both Lenovo and Motorola smartphones.
For India, which has set its sights on becoming a global manufacturing hub following the launch of the prime minister Narendra Modi’s Make in India campaign almost a year ago, having the Chinese tech giant expand its manufacturing operations in the country is a significant step forward in its ambitions.
India has many of the necessary elements to become a thriving global manufacturing powerhouse, but it must first overcome a series of challenges that are holding it back, analysts say.
The transition is vital for India, as it strives to boost its economic growth levels and create enough jobs for a population of more than 1.2 billion. More than 12 million Indians are entering the labour force every year.
“There is a huge scope in the sector,” says Mahesh Singhi, the managing director of Singhi Advisors, a global investment banking firm in Mumbai.
“India offers potential investors in the manufacturing sector a number of competitive advantages. India’s own domestic market is large, with more than 600 million rural consumers. Workers’ wages in India are less than half of those in China.”
Then he points out the negatives that threaten to derail the country’s ambitions. “India faces acute challenges such as power, ports, railroads and a shortage of skilled labour. India can definitely become a global manufacturing hub if the Modi government is able to resolve these issues and give a sustainable ecosystem for manufacturing to expand.”
The country has already had some significant success in attracting foreign companies in recent months. Foxconn, the Taiwanese company which manufactures Apple’s iPhone in China, in July revealed plans to open 10 to 12 factories in the country and create up to 1 million jobs by 2020.
The company last month signed an agreement with the state of Maharashtra, where Mumbai is located, to invest US$5 billion in a semiconductor manufacturing facility over five years. The US carmaker General Motors also last month unveiled plans to invest $1bn over the next few years to boost its exports out of India. Japan’s Toyota this month revealed plans to invest in India, according to The Economic Times, an Indian business newspaper. The Swedish telecoms company Ericsson recently said it planned to set up a second manufacturing facility in Pune, which aims be an export hub. Sony a few weeks ago started manufacturing its Bravia televisions at Foxconn’s facility in Chennai.
Xiaomi, China’s largest smartphone company, a few weeks ago started making smartphones at a Foxconn factory in the southern state of Andhra Pradesh.
On Monday, a memorandum of understanding was announced between India’s Reliance Defence and Abu Dhabi Ship Building to look at the possibility of a strategic partnership for building naval ships for the GCC.
“India has the potential to be a major global manufacturing hub,” says Kaustubh Shukla, the chief operating officer of the industrial products group at Godrej & Boyce, part of the conglomerate Godrej Group. “Our country features nearly all of the key ingredients necessary to transform its economy into a manufacturing centre – a demographic dividend, attractive domestic market, comparative advantage in shipping and labour costs, an inexpensive currency relative to the US dollar and low political risk.”
He also points to a plethora of obstacles when it comes to expanding its manufacturing sector.
“There are certain bottlenecks that need to be addressed such as lack of proper infrastructure, which includes slow land acquisition, frequent power outages faced by companies and below-par transport structure,” says Mr Shukla. “These are the basic things required, as manufacturing is highly reliant on well-functioning infrastructure. In addition, there is also a need to address tax- and labour-related issues.”
China is undoubtedly India’s biggest competitor in the manufacturing space, he says.
“The Chinese government’s support to manufacturing in the form of affordable cost of funds, cheap inputs and world-class infrastructure gives it an advantage over Indian manufacturers.”
Amar Babu, the chief operating officer of Lenovo Asia Pacific and the chairman of Lenovo India, says that the country is important to the company strategically and that “with an improving economic climate, India is now well-positioned as the next manufacturing hub of the world”.
But he would still like to see more being done to overcome the challenges. “The challenges that pull India a step down from becoming the global manufacturing destination are stringent policies, labour laws and inverted duty structures,” says Mr Babu.
“Factors including taxation, land acquisition, trade policy, are serious roadblocks. Apart from adding significantly to the cost of doing business, infrastructure bottlenecks deter foreign and private investors.”
There is also a need for “transparency in policy and predictability” to make it easier to do business in India, he says.
“Foreign investors expect a clear protocol without any grey areas to be able to conduct business efficiently.”
Interest rates being far higher in India than China is another stumbling block for the subcontinent, as it drives up costs for companies.
The government has long been trying to pass major reforms, including a universal goods and services tax (GST) and a land acquisition policy, which would help the sector.
“Policy reforms are the biggest challenges for the government,” says Satish Modh, the director of VES Institute of Management Studies and Research.
“Hopefully, the government would be able to convince the opposition parties to relent and support in major reforms, including GST legislation.”
The tax is one of India’s biggest economic reform proposals in decades, aimed at creating a single market across the country. But the government faced a setback this week when it failed to push through legislation in the current parliament session.
“In truth, not only does the finance ministry’s hope of introducing the GST by April next year look unrealistic, implementation by April 2017 would be a stretch too,” wrote Shilan Shah, a Singapore-based economist at Capital Economics.
Babu Padmanabhan, the founder and managing director of Steer, a materials technology company in India, expresses disappointment with the Make in India initiative so far.
“We should be able to feel there has been a change in policy,” he says. “We haven’t seen a change in policy yet. To grow manufacturing it is important to grow access to capital. It is important to provide capital at low costs. Without availability of capital resource at the various levels of industries, it is difficult for the Make in India story to have a truly social impact.”
The country does have strengths in many areas and has a vast pool “of trained or trainable” human resources, he adds.
“India has been a tremendous place for excellence in information technology, automobile manufacturing, textiles, steel and chemical technology, and in a number of fields it will continue to have potential.”
But Mr Padmanabhan says the biggest challenge is “uncertainty”.
“It is the lack of visibility and the inability to know how the future would turn out in terms of policymaking and continuity.”
And there is more competition on the way for India, putting pressure on the country to address the hurdles sooner rather than later.
“India faces competition from countries such as China, Thailand and Indonesia, where the governments have been investor-friendly for many years,” says Mr Singhi.
“The main advantage these countries have is the basic infrastructure, which is important for the manufacturing sector to flourish. The land and labour laws are more favourable in these countries than India. I believe India will have to catch up fast as the competition is likely to increase from other emerging countries such as Vietnam, the Philippines, Latin America and South Africa.”
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