Why Is FDI Keeping Its Distance from ‘Make in India’?

During the 2014 Indian general elections, one of Prime Ministerial candidate Narendra Modi’s key campaign promises was to turn India into a global manufacturing hub. For decades, Indian industries witnessed their Chinese counterparts rise rapidly as China became the preferred destination for manufacturing, turning the country into an export behemoth. At the same time, India’s own attempts at luring international companies to invest in the manufacturing sector were mostly futile. Modi and the Bharatiya Janata Party (BJP) wanted to buck this trend and pushed “Make in India” forward as one of the critical mandates in their election manifesto.

In September 2014, a mere four months after being voted into power, the new Prime Minister flagged off the ‘Make in India’ initiative. It was met with overwhelming enthusiasm among the Indian public and business community, as well as generating considerable interest in the international media. This was, after all, the game changer that had been promised – a panacea that would take the Indian manufacturing industry to the land of plenty. Such high hopes for “Make in India” seemed justified considering the background of PM Modi and his relationship with Foreign Direct Investment (FDI).

As the Chief Minister of the Indian state of Gujarat, Narendra Modi built his reputation as a pro-business leader who had the Midas touch when it came to attracting FDI. Japanese companies in particular were drawn towards investing in Gujarat, especially in infrastructure projects.

One has to remember that in terms of figures, Gujarat didn’t exactly seem like a hotbed for FDI. According to the figures released by the Reserve Bank of India (RBI) for the years 2000-2011, Gujarat received only about US$7.2 billion in FDI, compared to US$45.8 billion for the neighboring state of Maharashtra and over US$26 billion for the Delhi National Capital Region (NCR).

However, this was still a substantial rise in FDI for a state that was generally overlooked by foreign business interests. Modi brought the same zeal for FDI growth to the national scale.

In his first few months after being sworn in, PM Modi embarked on a whirlwind tour across the continents. Although he met many world leaders, the primary goal of his travels was to have tête-à-têtes with the captains of industry, such as a closed door meeting with the heads of Silicon Valley’s biggest companies. Every such trip was declared successful, with billions of U.S. dollars’ worth of FDI to India being promised.

But what effect – if any – has it actually had on “Make in India”?

Figures aren’t Everything

As it turns out, they don’t paint a complete picture. According to the most recent Economic Survey conducted by the Indian government, the annual rate of FDI inflow stands at US$75 billion – an impressive figure that is around the same as what China received during its growth boom in the period from the early to mid-2000s.

However, such statistics usually only take into account what has been pledged; the amount of FDI that actually does see the light of day is substantially lower. For example, during the five biannual Vibrant Gujarat Global Investors Summits from 2003 to 2011, the state of Gujarat – under the stewardship of CM Modi – signed memoranda of understanding (MoUs) for FDI worth US$876 billion. During the same period, China attracted FDI worth US$600 billion. In reality, rather than trying to draw in more FDI than China, Gujarat struggled to keep up with its own neighbors within India.

The same is now true for “Make in India”. While multiple MoUs are being signed by PM Modi on every state visit, the number of projects coming to fruition is drastically lower. The low conversion rate is proving to be a massive spoke in the wheels of the “Make in India” initiative. Moreover, a look at the breakdown of FDI by sector reveals that the services sector remains by far the most lucrative area for FDI, leaving the core “Make in India” sectors far behind.

In 2015-16, the services sector attracted 53.6 percent of all FDI, registering 136.8 percent year-on-year growth. By comparison, the manufacturing sector attracted only 18.6 percent of all FDI, managing to register a drop of 31 percent year-on-year. Apart from the automobile industry (US$2.5 billion FDI in 2015-16) and the pharmaceuticals sector (US$1.5 billion FDI in 2015- 16), “Make in India” has failed to excite foreign investors, and the consequences are starting to be felt in the manufacturing industry.

Too Much Too Soon

There is no question that the time to launch “Make in India” was the right one. As China moves away from a manufacturing-based economy to a consumer-driven one, it has created a vacuum that is there for the taking. When initially wooing FDI for “Make in India,” India’s demographic dividend and large domestic consumer base were touted as its biggest plus points; after all, the same had worked to China’s advantage before.

However, there are two factors that the “Make in India” initiative did not account for: 1. a substantial lack of skilled labor, and 2. bureaucratic red tape that makes it very difficult to do business.

Both these factors are massive red flags for any international companies that would like to invest in Indian manufacturing.

In the most recent ‘ease of doing business’ rankings, the World Bank ranked India 130th globally. While many new schemes and policies have been kicked off under the “Make in India” initiative to improve business conditions, India remains far from an ideal environment for a viable manufacturing hub. Elon Musk’s recent cool response to the Indian government’s overtures is seen as proof of the uphill road the manufacturing sector has had to take when converting FDI MoUs to realized projects. Despite laying out the proverbial red carpet for Tesla Motors, India has still not been earmarked as the manufacturing and export hub for the company’s South and Southeast Asian markets. “Make in India” may have a dazzling logo and hopeful message, but when it comes to FDI, it may have jumped the gun too soon for its own good.

Still a Hopeful Scenario

It would be a folly to write off the “Make in India” project as unsuccessful, though. As FDI continues to flow in, a lot of it will trickle over to the “Make in India”’ core sectors.

It may not be happening at the rate that was hoped for, but even a “some progress is better than no progress” scenario is a hopeful one. There has been a massive push to ensure that India’s youth have the right skill-sets that the manufacturing sectors need. Simultaneously, efforts are being made to cut bureaucratic red tape and provide foreign companies with the peace of mind that doing business in India will be a hassle-free experience. Any notable effects of these efforts will still take a long time to pan out – time that the “Make in India” initiative cannot afford as it loses steam. For now though, it is safe to say that for “Make in India”, the greatest impact of FDI – or rather the lack thereof – has been setting off alarm bells that should bring about much-needed change.

The author is a Mumbai-based creator and curator of digital content. He writes on business and management, and his works have been published in DNA India, Indian Management, and India Now: Business and Economy.