India – A hub for foreign investments in the manufacturing sector
India's manufacturing sector is fast developing into an investment hub for foreign players with foreign direct investment (FDI) of US$ 104.18 billion between April 2000 and December 2021. With initiatives like 'Make in India' and Atmanirbhar Bharat pushing local production as well as local assembly, India's manufacturing base has been steadily growing over the last few years. According to the World Bank's Ease of Doing Business Ranking 2020, India jumped 79 positions in just six years - from 142 in 2014 to 63 in 2019.
Manufacturing sector FDI break-up
The manufacturing sector has emerged as one of the highest growth sectors in India, which is attracting several MNCs to start production in the country. As per the breakdown of the manufacturing sub-sectors which attract the highest FDI in the chart below, automobile sector attracted the most FDI flows followed by
Manufacturing sector FDI growth drivers
The manufacturing sector FDI inflow has shown phenomenal growth – it stood at US$ 27.69 billion as of December 2011, growing to US$ 104.18 billion in December 2021, at a CAGR of 14.17%. This growth is spurred on by a variety of factors, which are listed below:
- India's large consumer base: With a population of almost 1.4 billion people, India has the second-largest consumer base in the world. With gross national income (GNI) per capita at current prices growing from Rs. 63,682 (US$ 828.53) in 2010-11 to Rs. 144,319 (US$ 1,877.66) in 2020-21, India's disposable income, and consequently, people's willingness to spend, has been increasing steadily over the past decade. Multiple MNCs are setting up operations in India to cater to the huge consumer base, and one of their main focus areas is to get their prices down. The easiest way to do this is to set up manufacturing bases in India, which invites FDI proposals.
- Availability of cheap labour: For manufacturing operations, India has plenty of cheap, skilled labour available. India has nearly 500 million people of working age, with a large share of this population being young and ready to work.
- Reducing import dependency: With initiatives like 'Make in India' and Atmanirbhar Bharat, the government's end goal is to reduce India's heavy dependency on imports and instead, set up manufacturing units domestically to increase self-reliance.
Government Policies & Initiatives
The government has played a massive part in turning India into a manufacturing hub. It has incorporated various policies and taken on multiple initiatives to ease the process of setting up a manufacturing base in this country:
- Reducing tax rate: In September 2019, the government slashed the base corporate tax rate from 25 to 15% for new manufacturing firms incorporated after October 1, 2019 and starting operations before March 31, 2023.
- Make in India: This was a government-led programme announced on September 25, 2014, to facilitate investment, build creativity, world-class infrastructure, and transform India into a manufacturing, design, and innovation hub. The Make in India initiative has achieved remarkable progress, and Make in India 2.0 now focuses on 27 areas.
- Production Linked Incentive (PLI) Schemes: PLI schemes were first introduced in India in March 2020, initially focusing on three industries – mobile manufacturing and electric components, pharmaceuticals, and medical device manufacturing. Since then, the PLI schemes have expanded to cover multiple sectors, with the government pledging to allocate Rs. 1.97 lakh crore (US$ 27.13 billion) across 13 sectors over the next five years (starting FY22).
- In September 2021, a PLI scheme for automobiles and auto components worth Rs. 25,938 crore (US$ 3.37 billion) was approved by the government to increase indigenous manufacturing capacity, including electric and hydrogen fuel cell car production. In February 2022, 20 companies were approved for this PLI scheme, with a proposed investment of Rs. 45,016 crore (US$ 5.86 billion) from approved applicants.
- In October 2021, the government approved the 'National Programme on Advanced Chemistry Cell (ACC) Battery Storage' Scheme worth Rs. 18,100 crore (US$ 2.35 billion) to achieve a manufacturing capacity of 50 Giga Watt Hour (GWh) of ACC.
- In December 2021, a Rs. 76,000 crore (US$ 9.89 billion) PLI scheme for semiconductor production was approved.
- In April 2021, a Rs. 4,500 crore (US$ 585.62 million) PLI scheme for boosting domestic manufacturing capacity of solar PV modules was approved. In November 2021, the funding for this scheme was revised to Rs. 24,000 crore (US$ 3.12 billion), with the goal now to make India an exporting nation of solar equipment.
- To attract investments, the government has set up various organisations such as the India Industrial Land Bank (IILB), the Industrial Park Rating System (IPRS), the soft launch of the National Single Window System (NSWS), the National Infrastructure Pipeline (NIP), and the National Monetisation Pipeline (NMP).
- The Department for Promotion of Industry and Internal Trade (DPIIT) tracks the total listed land available for industrial development in India, by state and sector, on its portal. Companies can use this information to scout out potential places for setting up their operations.
- The government has taken various steps to increase the ease of doing business by implementing measures like PM Gati Shakti, single window clearance and GIS-mapped land bank.
Major FDI deals in the manufacturing sector:
Listed here are some significant FDI deals that have taken place in the manufacturing space over the last couple of years:
According to a recent CII-EY report titled "FDI in India – Now, Next and Beyond, Reforms and Opportunities", India can expect to attract anywhere between US$ 120 billion to US$ 160 billion in FDI annually by 2025 if it manages to increase the FDI to GDP ratio between 3-4%. This FDI growth estimate is backed up by the growth potential of individual sectors:
- By 2030, the Indian government expects the electronics manufacturing sector to be worth US$ 300 billion.
- The display panel market in India is estimated to grow from US$ 7 billion in 2021 to US$ 15 billion in 2025.
- India's defence spending will increase to over US$ 250 billion in the next decade.
There are plenty of new Indian businesses cropping up to capitalise on the growth opportunities mentioned above. The manufacturing sector recorded 39,539 business registrations in FY21, compared with 26,406 in FY20, a growth of 50%.
Both existing businesses and new ones cannot excel without the government's support. During the Union Budget 22-23, Finance Minister, Ms. Nirmala Sitharaman stated that the PLI schemes implemented in 14 sectors towards achieving the goal of Atmanirbhar Bharat had received an excellent response, with the potential to create 60 lakh new jobs, and additional production of Rs. 30 lakh crore (US$ 390.42 billion) over the next 5 years. The government and Indian businesses working in tandem will go a long way into solidifying India's position as a manufacturing hub.