On paper, India’s chances of attracting global manufacturers look rosy.
Apple Inc. began assembling its latest iPhone models in the
South Asian nation in a significant break from its practice of reserving much
of that for giant Chinese factories run by its main Taiwanese assemblers, a key
win for Prime Minister Narendra Modi’s “Make in India” campaign.
Among India’s advantages are rising geopolitical tensions
between Western nations and China, and a growing friendship with the US,
Australia and Japan, which form part of the Quad, a grouping of democracies to
counter Beijing’s economic and military ambitions.
The country’s presidency of Group of 20 nations this year
could also boost investor confidence. India is poised to hold the title of the
world’s fastest-growing large economy in the next three years. Its gross
domestic product is set to become the world’s third-largest before the end of
the decade.
But experts warn that lasting gains to improve a sluggish
manufacturing sector are still a ways off for India, a country of 1.4 billion
people. Modi’s Make in India campaign, which aims to increase exports and
create jobs, hasn’t quite panned out. Manufacturing accounts for 14% of the
economy, a figure that’s barely budged in decades. And despite India’s massive
demographic dividend, unemployment remains stubbornly high.
Since Make in India launched in 2014, the deadline for one
of its key goals — to lift the share of manufacturing in GDP to 25% — has been
pushed back three times, from 2020 to 2022 to 2025.
Amitendu Palit, an economist specializing in international
trade and investment at the National University of Singapore, said decoupling
from China has “not yet been pronounced.” In other words, for any meaningful
relocation of supply chains, Palit said Modi’s government will need to prove
that India is a cheaper and easier place to conduct business, rather than
simply relying on political or security factors to lure companies.
While recent financial incentives under Modi offered Apple a
cost-efficient path to set up shop in India, the California-based company is
still making a fraction of its iPhones in the nation. And for every success,
there are many companies that have quit India because of long-running
challenges such as dealing with the country’s bureaucracy, including General
Motors Co., Ford Motor Co. and Harley-Davidson Inc.
To meet expectations of a transformed India, Modi must
continue to cut red tape and streamline labor laws. Ensuring businesses can
obtain land is another hurdle.
Take the case of ArcelorMittal SA. The world’s largest steel
producer attempted to build a steel plant in the eastern state of Odisha more
than a decade ago, but ditched the plan in 2013 because executives couldn’t
obtain land and permits needed to mine iron ore, a key raw material. The
company has once again returned to Odisha, with plans to build a 24-million-ton
a year plant through a joint venture with Nippon Steel Corp.
“It’s a difficult reform,” said Nada Choueiri, Mission Chief
for India at the International Monetary Fund. “But needs to be advanced because
when companies come and establish themselves, they need land.”
Employment is another headache. Delays in boosting
manufacturing and a broader decline in agriculture mean that the 12 or so
million Indians entering the workforce every year must rely largely on services
for opportunities. But India is struggling to create enough jobs even in that
sector, despite growing at a pace that few major economies can match.
Jobs are an important piece of the puzzle if India wants to
increase its per capita income, which is currently below neighboring
Bangladesh’s $2,723. Higher incomes will boost consumption, prompt businesses
to invest even more and create new jobs, setting off a so-called virtuous
economic cycle.
Though India continues to make headlines as the
fastest-growing major economy, “it’s disappointing in terms of the progress on
the ground,” said Shumita Deveshwar, chief India economist at consultancy TS
Lombard.
Deveshwar listed problems that are mostly self-inflicted:
weak infrastructure, a shortage of skilled labor and failure to implement
policies that can attract enough investment. Even as India is inking major
business deals — with Apple just one high-profile example — the consistency and
type of investments worries some.
In recent years, a large portion of foreign capital has trickled
into the services sector instead of production, according to Deloitte. Inflows
slowed in 2021, and beginning in 2020 India has fallen off the top 25 rankings
in Kearney’s FDI Confidence Index.
Kearney’s index measures the three-years-ahead confidence of
companies investing in a certain market. China, the United Arab Emirates,
Brazil and Qatar were the only emerging markets to make the 2022 list.
“Since the outbreak of the pandemic, our index has shown a
strong preference from investors for developed over emerging markets,” said
Terry Toland from Kearney. “This may suggest a perception of safety in
developed over emerging markets.”
Modi is betting that the G-20 presidency will create the
right opportunity to change that perception and beat back competition from
other Asian economies such as Vietnam and Malaysia.
“2023 is going to be different, assuming no new unexpected
shocks — global or domestic,” said Abhishek Gupta, senior India economist at
Bloomberg Economics. “The country has pretty much put in place a structure
already that should help kick-start an industrial recovery and boost
manufacturing,” he added.
Friend-shoring, in which allies invest in each other, and a
wider pivot away from China could benefit India — though the speed of change is
far from clear.
“There is a lot of inertia,” said V. Anantha Nageswaran,
India’s chief economic adviser. Leaving China is not a call that companies will
take lightly, he said, since “they have invested so much in a big market.”
Still, East Asian countries will eventually run into
capacity constraints at some point. “So I think we need to wait for these
things to play out,” Nageswaran said.
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