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Make in India Initiative and its Effects on the Manufacturing

Sector: A case Study

By

Asad ullah

&

Monirul Islam

Department of Business Administration, Aligarh Muslim University, Murshidabad Center,

India

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Abstract

Indian Manufacturing Industry is successfully competing in the global marketplace and

registering high growth on yearly basis, but large sections of ' Indian manufacturing' sector still

suffers from bottlenecks like - Use of primitive technology or under utilization of technology,

Poor infrastructure, Over staffed operations and expensive financing and bureaucracy. However,

This sector has the potential to elevate much of the Indian population above poverty by shifting

the majority of the workforce out of low-wage agriculture. Realizing this potential, The Make in

India programme was launched by Prime Minister Narendra Modi on 25 September 2014 in a

function at the Vigyan Bhawan. It is an initiative of the Government of India to

encourage Multinational and domestic companies to manufacture their products in India.

In a major boost to the ‘ The Make in India’ campaign the government of India has received

investment proposals of over Rs 1,10,000 crore (US$16.56 billion) in the last twelve months

from various companies and as a result India has become one of the most attractive destinations

for investment in the manufacturing sector.

Key words: Make in India, Manufacturing Sector and Investment.

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Introduction:

The Indian economy is the seventh-largest in the world by nominal GDP and the third-

largest by purchasing power parity (PPP). The country is classified as newly industrialized

country, one of the G-20 major economies, a member of BRICS and a developing economy with

approximately 7% average growth rate for the last two decades. India's economy became the

world's fastest growing major economy from the last quarter of 2014, replacing the People's

Republic of China. The long-term growth prospective of the Indian economy is moderately

positive due to its young population, corresponding low dependency ratio, healthy savings and

investment rates, and increasing integration into the global economy, The Indian economy has

the potential to become the world's 3rd-largest economy by the next decade, and one of

the largest economies by mid-century.

With 1.2 billion people and the world’s fourth-largest economy, India’s recent growth and

development has been one of the most significant achievements of our times. Over the six and

half decades since independence, the country has brought about a landmark agricultural

revolution that has transformed the nation from chronic dependence on grain imports into a

global agricultural powerhouse that is now a net exporter of food. Life expectancy has more than

doubled, literacy rates have quadrupled, and health conditions have improved. India will soon

have the largest and youngest workforce the world has ever seen. At the same time, the country

is in the midst of a massive wave of urbanization as some 10 million people move to towns and

cities each year in search of jobs and opportunity. It is the largest rural-urban migration of this

century. Massive investments will be needed to create the jobs, housing, and infrastructure to

meet soaring aspirations and make towns and cities more livable and green.

World Bank: "India Country Overview 2013"

India has one of fastest growing service sectors in the world with annual growth rate of above

9% since 2001, which contributed to 57% of GDP in 2012-13.India has capitalized its economy

based on its large educated English-speaking population to become a major exporter

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of IT services, BPO services, and software services with $167.0 billion worth of service exports

in 2013-14. The IT industry continues to be the largest private sector employer in

India. The agricultural sector is the largest employer in India's economy but contributes to a

declining share of its GDP (17% in 2013-14). India ranks second worldwide in farm output.

The Industry sector has held a constant share of its economic contribution (26% of GDP in 2013-

14).The Indian auto industry is one of the largest in the world with an annual production of 21.48

million vehicles in FY 2013-14. India has $600 billion worth of retail market in 2015 and one of

world's fastest growing E-Commerce markets.

India's two major stock exchanges, Bombay Stock Exchange and National Stock Exchange of

India, had a market capitalization of US$1.71 trillion and US$1.68 trillion respectively as of Feb

2015, which ranks 11th & 12 largest in the world respectively according to the World Federation

of Exchanges. India also home to world's third largest Billionaires pool with 97 billionaires in

2014 and fourth largest number of ultra-high-net-worth households that have more than 100

million dollars.

India is a member of the Commonwealth of Nations, the South Asian Association for Regional

Cooperation, the G20,the International Monetary Fund, the World Bank, the World Trade

Organization, the Asian Infrastructure Investment Bank, the United Nations and the New

Development BRICS Bank.

Despite all these facts the combination of protectionist, import-substitution, Fabian

socialism, social democratic-inspired policies governed India for sometime after the end of

British occupation. The economy was then characterized by extensive

regulation, protectionism, public ownership of large monopolies, pervasive corruption and slow

growth. However, since 1991, continuing economic liberalization has moved the country towards

a market-based economy. By 2008, India had established itself as one of the world's faster-

growing economies. Growth significantly slowed to 6.8% in 2008–09, but subsequently

recovered to 7.4% in 2009–10, while the fiscal deficit rose from 5.9% to a high 6.5% during the

same period. India's current account deficit surged to 4.1% of GDP during Q2 FY11 against

3.2% the previous quarter. The unemployment rate for 2012–13, according to Government of

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India's Labor Bureau, was 4.7% nationwide, by UPS method; and 3% by NSSO method. India's

consumer price inflation has ranged between 8.9 to 12% over the 2009-2013 periods.

India’s Global trade relations:

Until the liberalization of 1991, India was largely and intentionally isolated from the world

markets, to protect its economy and to achieve self-reliance. Foreign trade was subject to import

tariffs, export taxes and quantitative restrictions, while foreign direct investment (FDI) was

restricted by upper-limit equity participation, restrictions on technology transfer, export

obligations and government approvals; these approvals were needed for nearly 60% of new FDI

in the industrial sector. The restrictions ensured that FDI averaged only around $200 million

annually between 1985 and 1991; a large percentage of the capital flows consisted of foreign aid,

commercial borrowing and deposits of non-resident Indians.

India's exports were stagnant for the first 15 years after independence, due to general neglect of

trade policy by the government of that period. Imports in the same period, due to

industrialization being nascent, consisted predominantly of machinery, raw materials and

consumer goods.

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India's exports (top) and imports, by value, in 2013-2014.

Since liberalization, the value of India's international trade has increased sharply, with the

contribution of total trade in goods and services to the GDP rising from 16% in 1990–91 to 47%

in 2008–10. India accounts for 1.44% of exports and 2.12% of imports for merchandise trade and

3.34% of exports and 3.31% of imports for commercial services trade worldwide. India's major

trading partners are the European Union, China, the United States of America and the United

Arab Emirates. In 2006–07, major export commodities included engineering goods, petroleum

products, chemicals and pharmaceuticals, gems and jewellery, textiles and garments, agricultural

products, iron ore and other minerals. Major import commodities included crude oil and related

products, machinery, electronic goods, gold and silver. In November 2010, exports increased

22.3% year-on-year to 850.63 billion (US$13 billion), while imports were up 7.5% at 1251.33

billion (US$19 billion). Trade deficit for the same month dropped from 468.65

billion (US$7.1 billion) in 2009 to 400.7 billion (US$6.0 billion) in 2010.

As the third-largest economy in the world in PPP terms, India has attracted foreign direct

investment; during the year 2011, FDI inflow into India stood at $36.5 billion, 51.1% higher than

2010 figure of $24.15 billion. India has strengths in telecommunication, information technology

and other significant areas such as auto components, chemicals, apparels, pharmaceuticals, and

jewellery. Despite a surge in foreign investments, rigid FDI policies were a significant hindrance.

Poverty and Employment scenario in India:

The World Bank in 2010, using its older 2005 methodology, estimated about 400 million people

in India, as compared to 1.29 billion people worldwide; live on less than $1.25 (PPP) per day.

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The World Bank reviewed and proposed revisions in May 2014, to its poverty calculation

methodology and purchasing power parity basis for measuring poverty worldwide, including

India. According to this revised methodology, the world had 872.3 million people below the new

poverty line, of which 179.6 million people lived in India. In other words, India with 17.5% of

total world's population had 20.6% share of world’s poorest in 2013.

Agricultural and allied sectors accounted for about 52.1% of the total workforce in 2009–10.

While agriculture employment has fallen over time in percentage of labor employed, services

which include construction and infrastructure have seen a steady growth accounting for 20.3% of

employment in 2012–13. Of the total workforce, 7% is in the organized sector, two-thirds of

which are in the government controlled public sector. About 51.2% of the labor in India is self-

employed. According to a 2005–06 survey, there is a gender gap in employment and salaries. In

rural areas, both men and women are primarily self-employed, mostly in agriculture. In urban

areas, salaried work was the largest source of employment for both men and women in 2006.

Unemployment in India is characterized by chronic (disguised) unemployment. Government

schemes that target eradication of both poverty and unemployment (which in recent decades has

sent millions of poor and unskilled people into urban areas in search of livelihoods) attempt to

solve the problem, by providing financial assistance for setting up businesses, skill honing,

setting up public sector enterprises, reservations in governments, etc. The decline in organized

employment due to the decreased role of the public sector after liberalization has further

underlined the need for focusing on better education and has also put political pressure on further

reforms.

Keeping all these scenarios in mind this study seeks to bring out the major initiatives and

highlights of “Make in India” initiative announced by PM Modi.

Case Study of Make in India Initiative:

Made in India? Why manufacturing is the best route to development

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Manufacturing sector is the backbone of any economy. It fuels growth, productivity,

employment, and strengthens agriculture and service sectors. Astronomical growth in worldwide

distribution systems and IT, coupled with opening of trade barriers, has led to stupendous growth

of global manufacturing networks, designed to take advantage of low-waged yet efficient work

force of India.

According to China’s president, Xi Jinping, India should follow the example of China to make its

way in the world rather than rely on its service sector. Recently he said that “the combination of

the world’s factory and the world’s back office will produce the most competitive production

base”. He was referring to China and India, respectively. The world’s two most populous

economies have been growing at impressive rates, but China has been climbing the ladder faster

and laid a more solid foundation for future development. How? Xi’s statement inadvertently

provides the answer: China has expanded its manufacturing base while India has specialized in

services. But whereas the former is a necessary precondition for sustained economic growth, the

latter is a less certain development path. Since the industrial revolution, almost all countries that

have managed the transition from low to high income have undergone industrialization,

diversifying and upgrading their production structure, relinquishing dependence on agriculture

and natural resources. The East Asian Tigers – the most successful examples of late developers –

all had targeted industrial policies. India has a trade surplus in services that covers only one-

fifth of its trade deficit in goods.

'Come, Make in India'! PM Modi's aggressive push to revive an ailing manufacturing sector, has

found resonance with India Inc. Single-window clearances, minimal procedures & cutting out of

any red-tapism - PM Modi sees Make in India as a vital impetus for employment & growth. The

Make in India program includes major new initiatives designed to facilitate investment, foster

innovation, protect intellectual property, and build best-in-class manufacturing infrastructure.

The major objective behind the initiative is to focus on 25 sectors of the economy for job

creation and skill enhancement. Some of these sectors

are: automobiles, chemicals, IT, pharmaceuticals, textiles, ports, aviation, leather, tourism and ho

spitality, wellness,railways, design manufacturing, renewable energy, mining, bio-technology,

and electronics.

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The initiative hopes to increase GDP growth and tax revenue. The initiative also aims at high

quality standards and minimizing the impact on the environment. The initiative hopes to attract

capital and technological investment in India.

The Initiatives:

Doing business in India just got easier – new de-licensing and deregulation measures are

reducing complexity, and significantly increasing speed and transparency. India’s manufacturing

infrastructure and capacity for innovation is poised for phenomenal growth: new smart cities and

industrial clusters, being developed in identified industrial corridors having connectivity, new

youth-focused programs and institutions dedicated to developing specialized skills. With the

easing of investment caps and controls, India’s high- value industrial sectors – defense,

construction and railways – are now open to global participation.

Recent policy measures:

Since 1991, the regulatory environment in terms of foreign investment has been consistently

eased to make it investor-friendly as a result it has been ranked among the top 3 attractive

destinations for inbound investments. In order to attract the global companies to base their

production activities in India, the government has brought some of the changes in the policies

listed as under:

100% FDI allowed in medical devices

FDI cap increased in insurance & sub-activities from 26% to 49%

100% FDI allowed in the telecom sector.

100% FDI in single-brand retail.

FDI in commodity exchanges, stock exchanges & depositories, power exchanges,

petroleum refining by PSUs, courier services under the government route brought under

the automatic route.

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Removal of restriction in tea plantation sector.

FDI limit raised to 74% in credit information & 100% in asset reconstruction companies.

FDI limit of 26% in defense sector raised to 49% under Government approval route.

Foreign Portfolio Investment up to 24% permitted under automatic route. FDI beyond

49% is also allowed on a case to case basis with the approval of Cabinet Committee on

Security.

Construction, operation and maintenance of specified activities of Railway sector opened

to 100% foreign direct investment under automatic route.

Sectors with restrictions

Sectors where foreign direct investment is Prohibited:

Lottery Business including Government /private lottery, online lotteries, etc.

Gambling and Betting including casinos etc.

Chit funds

Nidhi company-(borrowing from members and lending to members only).

Trading in Transferable Development Rights (TDRs)

Real Estate Business (other than construction development) or Construction of Farm Houses

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes

Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway

Transport (other than construction, operation and maintenance of (i) Suburban corridor projects

through PPP, (ii) High speed train projects, (iii) Dedicated freight lines, (iv) Rolling stock

including train sets, and locomotives/coaches manufacturing and maintenance facilities, (v)

Railway Electrification, (vi) Signaling systems, (vii) Freight terminals, (viii) Passenger

terminals, (ix) Infrastructure in industrial park pertaining to railway line/sidings including

electrified railway lines and connectivity’s to main railway line and (x) Mass Rapid Transport

Systems.)

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Services like legal, book keeping, accounting & auditing.

Entry structures

Incorporating a company in India:

It can be a private or public limited company. Both wholly owned & joint ventures are allowed.

Private limited company requires minimum of 2 shareholders.

Limited liability partnerships:

Allowed under the Government route in sectors which has 100% FDI allowed under the

automatic route and without any conditions.

Sole proprietorship/partnership firm:

Under RBI approval.

RBI will decide the application in consultation with Government of India.

Extension of foreign entity:

Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the

activities specified by the RBI. Approvals are granted under the Government and RBI route.

Automatic route is available to BO/PO meeting certain conditions.

Other structures:

Foreign investment or contributions in other structures like not for profit companies etc. are also

subject to provisions of Foreign Contribution Regulation Act (FCRA).

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Steps involved in Investment

Identification of structure

Central Government approval if required

Setting up or incorporating the structure

Inflow of funds via eligible instruments and following pricing guidelines

Meeting reporting requirements of RBI and respective Act

Registrations/obtaining key documents like PAN etc.

Project approval at state level

Finding ideal space for business activity based on various parameters like incentives,

cost, availability of man power etc.

Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum

(IEM), some of the industries may also require industrial license.

Construction/renovation of unit

Hiring of manpower

Obtaining licenses if any

Other state & central level registrations

Meeting annual requirements of a structure, paying taxes etc.

Incentives

Central government Incentives:

Investment allowance (additional depreciation) at the rate of 15 percent to manufacturing

companies that invest more than INR 1 billion in plant and machinery available till to 31.3.2015.

Incentives available to unit’s set-up in SEZ, NIMZ etc. and EOUs.

Exports incentives like duty drawback, duty exemption/remission schemes, focus products &

market schemes etc.

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Areas based incentives like unit set-up in north east region, Jammu & Kashmir, Himachal

Pradesh, and Uttarakhand.

Sector specific incentives like M-SIPS in electronics.

State government Incentives:

Each state government has its own incentive policy, which offers various types of incentives

based on the amount of investments, project location, employment generation, etc. The

incentives differ from state to state and are generally laid down in each state’s industrial policy.

The broad categories of state incentives include: stamp duty exemption for land acquisition,

refund or exemption of value added tax, exemption from payment of electricity duty etc.

Green technology & practices: In order to be environmental friendly and sensitive towards global concern for the environment

the government has decided to provide following incentives to the companies under make in

India initiatives.

5% interest in reimbursement & 10% capital subsidy for the production of

equipment/machines/devices for controlling pollution, reducing energy consumption and

water conservation.

A grant of 25% to SMEs for expenditure incurred on audit subject to a maximum of INR

1,00,000.

A 10% one-time capital subsidy for units practicing zero water discharge.

A rebate on water cess for setting up wastewater recycling facilities.

Incentives for renewable energy under the existing schemes.

An incentive of INR 2,00,000 for all buildings which obtain a green rating under the

IGBC/LEED or GRIHA systems.

Make in India Impact:

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The launch of the ‘Make in India’ campaign by India’s Prime Minister, Narendra Modi, is a

welcome move aimed at making India a more attractive investment destination. The programme

is designed to facilitate inward investments and build the country's manufacturing infrastructure.

It includes plans to make doing business in India easier, more efficient and transparent.

Manufacturing currently accounts for only 15% of India’s gross domestic product (GDP) and the

Government wants to raise that to 25% by 2022. The Modi administration is committed to

transforming India into a global manufacturing hub, while ensuring that manufactured goods

have ‘zero defect’ and ‘zero effect’ on the environment. With ‘Make in India’, the Government

aims to eliminate unnecessary regulations, shorten bureaucratic processes, upgrade infrastructure

and open up new sectors to foreign direct investment (FDI).

As a result of these policy initiatives, the government has been able to attract investment

proposals of over Rs 1,10,000 crore in the last twelve months. Some of the proposals made are

listed below:

Sony corp is getting back to manufacturing in India after nearly a decade with plans to

make two models of the Bravia brand of television sets at Foxconn’s Sriperumbudur

plant.

The Hinduja group has launched its digital TV distribution business as part of its Make in

India push. It will work on the head end –in-the sky (HITS) technology and entail a

minimum investment of Rs 5,000 crore.

Siemens has announced that it will invest Rs 1 billion (US$ 1.13 billion) in India to add

4,000 jobs to its existing workforce of 16,000 in the country.

Samsung Electronics has invested Rs 517 crore (US$ 77.82 million) towards the

expansion of its manufacturing plant in Noida.

IKEA plans to double sourcing from India to Rs 630 million (US$ 711.65 million) by

2020.

In an effort to push Digital India initiative, Silicon valley- based tech giant Qualcomm

will invest $ 150 million for Indian start-ups.

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Among the 25 sectors identified for Make in India campaign, defense and aerospace are

being increasingly looked upon as one of the most promising segments to push indigenous

manufacturing. The Indian aerospace and defense market is the 7th largest globally with

strong demand emanating across the triad of user services.

The government has placed defense orders worth Rs 2 lakh crore under buy and Make in

India category to boost local manufacturing sector. This itself involves a larger role of

foreign investors and gives greater flexibility to domestic industry to participate in

defense order.

Larsen and Tourbo have emerged as the finalist for a $750 million (about Rs 5,000 crore)

contract to supply 100 self propelled artillery guns to the Indian Army.

American aviation giant Boeing is in talks with Indian firms to manufacture parts of

Apache helicopter which will greatly enhance India’s capabilities across a range of

military and humanitarian missions.

Tata power has initiated building its Rs 450 crore defense production unit in Karnataka to

create a state-of- the art integrated digital design to manufacturing facility for large

systems engineering and integration.

The automobile industry is an important sector in the “Make in India” initiative and has been

identified as one of the 25 thrust sectors outlined for growth.

BMW and Mercedes –Benz have intensified their localization efforts to be part of “Make

in India” initiative. Mercedes Benz has doubled its India assembly capacity to 20,000

units annually, making India one of first market to make the GLA entry SUV outside of

Germany.

Suzuki Motor Corp too plans to make automobiles for Africa, the company’s next big

bet, as well as for India at its upcoming factory in Hansalpur, near Ahmadabad, Gujarat.

Conclusion:

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The need to raise the global competitiveness of the Indian manufacturing sector is imperative for

the country’s long term-growth. The National Manufacturing Policy is by far the most

comprehensive and significant policy initiative taken by the Government. The policy is the first

of its kind for the manufacturing sector as it addresses areas of regulation, infrastructure, skill

development, technology, availability of finance, exit mechanism and other pertinent factors

related to the growth of the sector. Further, 'Indian Manufacturing' sector must focus on areas

like improving the urban infrastructure, ensuring fair competition and access to markets,

reduction of import duties, quality improvements in vocational and higher education, increased

investment in R&D and support of SMEs.

Government leaders, experts, and researchers focusing towards making Indian manufacturing

globally competitive and to have a sustained growth, contributing significantly to GDP growth,

employment generation and overall economic development.

Learning’s and Implications for the Investors:

Learning-1: The Make in India initiative calls for self-sufficiency by creating goods within the

country. The manufacturing and services sectors will be expanded in 25 sectors. As a result

many new plants, factories, infrastructure facilities and R&D units will come up in the next few

years.

Learning-2: Manufacturing locally in India will enable companies to make significant savings

on import duty and logistics costs. It will also lead to significant reduction in lead time for

deliveries to the customer, specifically in the case of complex engineering or high-tech products.

This will allow companies to be far more responsive and flexible to changing customer needs.

Also, servicing of the locally manufactured products would be much convenient as it will be easy

to understand the technology which has been used for manufacturing local products.

Learning-3: There is a need to have people who can act as a bridge between various cultures

and countries and have the ability to connect people from different backgrounds but pursue the

same cause. The Make in India program represents an attitudinal shift in how India relates to

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investors: not as a permit-issuing authority, but as a true business partner. Dedicated teams that

will guide and assist first-time investors, from time of arrival.

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References:

www.nexia.com/news/2014/make-in-india-campaign-making-an-impact-on-foreign-investment

www.wikipedia.org/wiki/Make_in_India.

www.business.mapsofindia.com/indiaindustry/manufacturing.html#sthash.lngWjQWa.dpuf

www.wikipedia.org/wiki/Economy_of_India

ABOUT THE AUTHOR

Dr. Asad ullah is an Assistant Professor in the Department of Business Administration, Aligarh

Muslim University, Murshidabad center, India. He has an Economics background with an M.B.A

in International Business and a Doctorate in Management. He has two years of teaching

experience and numerous publications to his credit in both national and international journals.

His areas of interest include supply chain Management; Retailing and International Marketing

etc.

He can be reached at asad_hazari@yahoo.com. (+91-9002510788, 9997935829)

Mr. Monirul Islam is an Assistant Professor in the Department of Business Administration,

Aligarh Muslim University, Murshidabad center, India. He has a Science background with

masters in medical science along with an M.B.A in Marketing and PGPBM. He has two years of

corporate and four years of teaching experience and numerous publications to his credit in both

national and international journals. His areas of interest include marketing management;

Retailing and Rural management etc.

He can be reached at moni05081985@gmail.com. (+91-9883642443, 9852076386)