On September 25, 2014, Prime Minister Narendra Modi summoned top business leaders, diplomats and reporters to New Delhi’s Vigyan Bhawan for the launch of the ‘Make in India’ initiative. The importance of the announcement was made obvious: it was broadcast live in Indian diplomatic missions globally.
“Now, a new era of economic regeneration has begun and that belongs to Asia. It is our responsibility how to make it belong to India,” Modi told the gathering, which included leaders of global
On September 25, 2014, Prime Minister Narendra Modi summoned top business leaders, diplomats and reporters to New Delhi’s Vigyan Bhawan for the launch of the ‘Make in India’ initiative. The importance of the announcement was made obvious: it was broadcast live in Indian diplomatic missions globally.
“Now, a new era of economic regeneration has begun and that belongs to Asia. It is our responsibility how to make it belong to India,” Modi told the gathering, which included leaders of global multinational companies. India lost the opportunity when the industrial revolution swept the West three centuries ago, he said, as he called for India to leverage labour-intensive manufacturing and create millions of jobs.
Even as India’s economic growth has been high — it is today the fastest-growing large economy, according to the International Monetary Fund (IMF); and the Reserve Bank of India (RBI) has said that India will clock more than 8% growth in the current fiscal year — the growth is unevenly distributed. Rural wage growth has remained stagnant, and the country is struggling to create meaningful jobs for its young workforce. Past efforts by the government to boost manufacturing in India did not work: the share of manufacturing in India’s Gross Domestic Product has declined from about 17% in 2010 to about 13% in 2022, thereby hampering a farm-to-factory economic transformation that propelled countries such as China to prosperity.
In 2020, the government announced a Production Linked Incentive (PLI) scheme to revive manufacturing. Under the scheme, the government will pay manufacturers if they keep producing more. India has allocated about ₹1.97 lakh crore for this scheme, targeting sectors such as electronics, pharmaceuticals, telecom and renewable energy, among others, all of which are essential for building a global factory hub. And there are tailwinds. India’s latest push for manufacturing has come at a time when a unique business strategy has taken hold of the global economy: China plus one. Global firms are diversifying manufacturing away from China to hedge against any investment risks owing to geopolitical tensions.
There are signs of success. Apple has ramped up its manufacturing facilities in Sriperumbudur, an industrial town in Tamil Nadu, and aims to produce about 50 million iPhones annually in India by 2025, or one in four iPhones produced globally. Last year, Apple CEO Tim Cook flew down to New Delhi to meet Modi and reaffirmed the company’s commitment to India. Apple has reportedly generated 100,000 blue-collar factory jobs in India.
However, this trend has yet to spread beyond Apple even after three years of providing production subsidies. Since 2021, when inflows were at a record $85 billion, FDI has declined affecting sectors such as computer software and hardware, automobile, construction and metallurgical industries, government data indicates. Between April and December 2023, the total FDI in India declined by about 13% to just $32 billion.
“Without doubt, multinational firms want to move out of China, and the only other big production and consumption centre where they could move is India. The government has realised that this situation presents a historic opportunity for the country, and it is determined to seize it. It is even sweetening the deal by giving firms subsidies to move production to India. But so far not that many firms are taking advantage,” said Josh Felman, head of the Washington D.C.-based JH Consulting, who also led the International Monetary Fund’s (IMF) India office in the mid-2000s.
“We thought Apple might be the vanguard of a big wave, but so far this hasn't happened.”
“China’s decline does not ordain India’s rise,” Felman said.
Consider the electronics sector. In January 2024, the India Cellular & Electronics Association found that India imposes much higher tariffs on the import of electronic components than Vietnam and China. Moreover, unlike India, Vietnam has Free Trade Agreements (FTAs) with countries from where it imports goods —covering about 80% of imports — and levies just 0.7% import tariff compared to India’s 6.7%. The ICEA’s assessment stated that unless India reverses its import tariffs, its export growth would slow down.
The declining trend of import tariffs reversed as India jacked up tariffs on a variety of goods in order to protect its domestic industry: since 2016, tariffs have gone up on about 500 goods, the Indian Express reported.
“There's a further problem, in that protectionism discourages investment. Think about an actual and important example -- the garment industry. In Bangladesh and Vietnam, garment firms have guarantees that their supplies will arrive duty-free because these countries have free trade agreements with all the major economies, which inscribe zero tariffs into law. But in India, tariffs are higher and there's no guarantee that might not be increased further tomorrow. As a result, garment firms in India will be much more reluctant to invest than firms in Bangladesh or Vietnam. And that makes it difficult to develop the industry,” Felman said. “It damages your exports, not just today but also tomorrow.”
India, however, has maintained that import tariffs are needed to protect its domestic industry. Speaking after the first India-EU Trade and Technology Council meeting in Brussels last year, Commerce minister Piyush Goyal stated that India’s high tariffs are in response to competition from “non-transparent geographies”.
Goyal said India’s tariffs are often “misconstrued" to be very high on most items, raw materials and intermediates. But in reality, the duties are very low. As per the commerce ministry’s official statement, Goyal said duties on technological items which are helping the Indian economy grow are very low and that the actual applied rates of tariffs are lower than the agreed bound rates at the WTO, Mint reported.
The government has also promised huge subsidies to help turn India into a semiconductor manufacturing hub. However, former RBI governor Raghuram Rajan questioned the quantum of money allocated to give away as production subsidies. Rajan has also called into question India’s pivot to manufacturing as a future economic model and has said that India should rather leverage its booming services sector to propel growth.
According to Felman, rather than offering protection to firms that set up factories in India, the government should copy the economic strategy of reducing tariffs and trade barriers that China employed when it was industrialising. After China joined the World Trade Organisation (WTO) in 2001, it reduced import tariffs and further liberalised trade, which boosted its labour-intensive manufacturing exports. In 2009, China overtook Germany to become the world’s top exporter. In 2023, even as its economy slowed down and it faced trade tensions with the US and EU, China exported goods worth about $3.4 trillion.
“Perhaps we just need to wait a bit longer, as the shift out of China is only just beginning," said Felman.
One Subscription.
Get 360° coverage—from daily headlines
to 100 year archives.
Archives
HT App & Website