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Make in India: A Year in Review

By Melissa Cyrill, Dezan Shira & Associates
Posted: 2nd October 2015 10:24

Make in India is one year old this week. Designed to kick-start India’s lagging manufacturing sector, the national program has affirmed the business-friendly nature of the Bharatiya Janta Party (BJP)-led National Democratic Alliance (NDA) government. This was a key campaign promise by the BJP in the 2014 general elections – regain foreign investor confidence after years of high-profile corruption scandals and some adversarial economic policies.
Yet, even as Make in India has made the country a more competitive investment destination, it will take several years before the program’s effectiveness can be fully gauged.

Modi Magic?

Prime Minister Modi has fronted the Make in India program during his official visits to 28 countries in the past 15 months. This level of personal investment is not just linked to his overwhelming electoral mandate, and plans to increase India’s global standing, but also to the expectations of his corporate allies who financed his electoral campaign. Thus far, India has received over US $19 billion in foreign direct investment (FDI) in 2014-2015 from a dozen major FDI source countries that Modi visited since taking over in May 2014.

This week Modi will be in the U.S. for the UN General Assembly (UNGA). Besides bilateral meetings on the UNGA sidelines, he will meet with the CEOs of the world’s top companies to discuss ideas that will transform India into the next global manufacturing hub. Next, he will travel to Silicon Valley where he will meet industry leaders to promote his Digital India, Skill India and Smart Cities schemes, which all complement the Make in India program.

In contrast to the slow response to the initial Make in India call, Modi’s U.S. visit may generate a more positive response in 2015. Over the past year, the government has laid some important groundwork. Government legislation – such as the Union Budget and the formation of the think tank Niti Aayog (National Institution for Transforming India Aayog) – has sought to make the states equal partners in the national economic growth.

The Make in India program, meanwhile, has focused on 25 industries where a 100 percent FDI has been allowed, with exceptions for space (74 percent), defense (49 percent) and news media (26 percent). This summer welcomed a host of investments; many top executives name-checked Make in India as a reason for their investment. The summer’s highlight was Foxconn signing a US $5 billion MoUwith Maharashtra state in August.

The following illustrates some of the success that has been associated with Make in India:

  • Electronic System and Design Manufacturing
  • Following up on the call to Make in India, consumer electronics manufacturing companies have led the waywith some concrete investments. The industry recently witnessed significant investments by smartphone makers Lenovo & Motorola, Sony, Xiaomi and Gionee. Some executives from these companies point to Make in India as influencing their decision to begin local production. Other global smartphone makers like Asus, Oppo and HTC have similarly expressed their interest in manufacturing in India.
  • Automotive
  • In the automobile industry, the Make in India campaign has highlighted automatic approval for foreign equity investment up to 100 percent with no minimum investment criteria, and that manufacturing and imports are exempt from licensing and approvals. Responding to this, major foreign players have announced plans to manufacture components for luxury cars – such as Mercedes Benz – and localizing manufacturing to lower costs – such as BMW, Volvo, Renault and Ford.
  • Auto component manufacturing in India is already genuinely competitive in the global market – Hyundai, Honda, and Toyota all make parts in India on a reliable basis and are increasing exports. However, Make in India is increasing the country’s reputation in the industry. Recently, General Motors announced it will invest US $1 billion in its bid to make cars for domestic consumption and export.
  • Defense
  • To support Make in India, the government has recently raised the FDI cap for defense manufacturing up to 49 percent and eased some other regulations for the industry. These reforms have caused a flurry of investment activity. Hyundai Heavy Industries (HHI) of South Korea has announced it will work with Hindustan Shipyard Limited to build warships in India, while Samsung has agreed to build LNG tankers with Kochi Shipyard. Reliance Infrastructure is in discussion with multiple partners to build nuclear submarines and stealth warships in India.
  • U.S. defense manufacturer Lockheed Martin has been granted clearance for a project office in New Delhi. Their largest programme in India is the C-130J Super Hercules, and through its joint venture with Tata Advanced Systems, Tata Lockheed Martin Aerostructures will manufacture airframe components for the C-130J.
  • Renewable Energy
  • The solar industry has also benefited from the Make in Indiainitiative as the government has projected the sector to be a US $100 billion investment magnet over the next seven years. The government has designed an attractive incentive package to help achieve this target with foreign companies of all sizes. A number of major corporations have announced investments in the past year, including Foxconn, SoftBank, Bharati Enterprises, Adani Power, Reliance Power and SunEdison.

Challenges Limit Scope for Growth

Make in India faces many challenges that limit the impact it makes on the ground. The program has undoubtedly reduced mental barriers to investing in India for many foreign executives, and demonstrated clear government resolve.  However, the government has not been able to build on Make in India as rapidly as planned, while aspects of the Make in India scheme remain difficult for foreign investors to piece together in meaningful ways. Some critics allege that Make in India isn’t as user friendly as its feel-good marketing.

  • Political Gridlock
  • The strength of the opposition in the upper house of the parliament has meant that key economic proposals to support Make in India have not been passed. Reforms for land acquisition and labor, amongst others, remain pending, while the Goods and Services Tax (GST) is now tentatively slated for early 2016.
  • In fact, the last session of parliament was a legislative washoutbecause of political stalemate. Despite an overwhelming electoral mandate, Modi has not developed the political arguments or parliamentary alliances needed to implement many of the economic reforms that are critical to Make in India.
  • State Power
  • The success of Make in India does not lie exclusively within New Delhi. India has a federal political system like the U.S. New Delhi relies on the cooperation of state-level decision-makers, who in turn rely on New Delhi for national funding to support development projects. Many BJP-led state governments have successfully implemented reforms to support Make in India, and even developed copycat state-led investment schemes.
  • However, other states have yet to rally around the program, especially those without a BJP-led government. Modi and his government will need to foster more state-level consensus around their investment promotion schemes to achieve national progress with Make in India. Otherwise, development in India will likely remain fragmented.
  • Too Many Eggs for One Basket
  • The Make in India program has been tied into a number of schemes that are difficult for many foreign observers to assess on an industry by industry basis. For example, Skill India, Housing for All, Smart Cities and Digital India, amongst many others, are all partly designed to encourage domestic manufacturing, job creation and greater investment.
  • Where one initiative ends and another begins is less than clear. Although these initiatives have been pitched as inducements for investors, foreign investors need to invest in local support to design a market entry plan that avails of all available schemes.
  • Manufacturing Ecosystem Needed
  • Initial investments have been tremendously exciting, more so as India’s economy is seen as the next Asian juggernaut after China. However, a lot needs to be achieved for these investments to convert into actual physical growth. For instance, India has to develop sophisticated supply chain systems, internet connectivity, and roads and highway infrastructure – in other words, the right manufacturing ecosystem.
  • Good Momentum
  • Whether Make in India is successful may only be assessed over the next few years, but present momentum plays a role in ascertaining its immediate credibility. The program has indeed highlighted the manufacturing potential for a diverse array of industries in the Indian economy. It has also provided a plan for large-scale infrastructure projects. At the same time, the campaign has piggy-backed on the continued successes of certain highly performing sectors. As a consequence, it will take several years before analysts can effectively measure the success of Make in India.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

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