(Bloomberg) — On paper, India’s chances of attracting global manufacturers look rosy.
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Apple Inc. started. In assembling its latest iPhone models in the South Asian country in a major break from its practice of reserving much of that for giant Chinese factories run by major Taiwanese assemblers, a key win for Prime Minister Narendra Modi’s “Make in India” election campaign. .
Among India’s advantages are rising geopolitical tensions between Western countries and China, and a growing friendship with the United States, Australia and Japan, which are part of the Quartet, a group of democracies to counter Beijing’s economic and military ambitions.
The country’s presidency of the G-20 this year could also boost investor confidence. India is poised to retain the title of the world’s fastest growing major economy in the next three years. Its GDP is set to become the third largest in the world before the end of the decade.
But experts warn that lasting payoffs for improving a stagnant manufacturing sector remain a long way off for India, a country of 1.4 billion people. Modi’s Make in India campaign, which aims to boost exports and create jobs, has not been entirely successful. Manufacturing accounts for 14% of the economy, a number that has barely budged in decades. And despite India’s massive demographic dividend, unemployment rates remain stubbornly high.
Since launching Make in India in 2014, the deadline for one of its key targets – to raise manufacturing’s share of GDP to 25% – has been pushed back three times, from 2020 to 2022 to 2025.
Amitendo Pallet, an economist who specializes in international trade and investment at the National University of Singapore, said the detachment from China “has not been announced yet.” In other words, for any meaningful relocation of supply chains, Pallitt said the Modi government will need to demonstrate that India is a cheaper and easier place to do business, rather than simply relying on political or security factors to attract companies.
While recent financial incentives under Modi have provided Apple with a cost-effective path to setting up shop in India, the California-based company still makes a fraction of its iPhones in the country. And for every success, there are many companies that have left India due to long-standing challenges like dealing with the country’s bureaucracy, including General Motors, Ford Motor Company and Harley-Davidson.
To meet the expectations of a transformed India, Modi must continue to cut red tape and streamline labor laws. Ensuring companies get access to land is another hurdle.
Take the case of ArcelorMittal SA. The world’s largest steel producer had tried to build a steel mill in the eastern state of Odisha more than a decade ago, but abandoned the plan in 2013 because executives could not get the land and permits needed to mine iron ore, a key raw material. The company is back in Odisha, with plans to build a 24 Mtpa plant through a joint venture with Nippon Steel Corp.
“It’s a tough fix,” said Nada Choueiri, mission chief for India at the International Monetary Fund. “But it has to be developed because when companies come in and establish themselves, they need the land.”
Employment is another headache. Delays in boosting industrialization and a broader decline in agriculture mean that the 12 million or so Indians entering the labor force each year must largely rely on services for opportunities. But India is struggling to create enough jobs even in this sector, despite growing at a pace that few major economies can match.
Jobs are an important piece of the puzzle if India is to increase its per capita income, which is currently less than $2,723 in neighboring Bangladesh. Higher incomes will lead to an increase in consumption, prompting companies to increase investment and create new jobs, thus triggering the so-called virtuous economic cycle.
Although India continues to grab headlines as the fastest growing economy, it is “disappointing in terms of progress on the ground,” said Shumita Deveshwar, chief economist for India at consultancy TS Lombard.
Deveshwar mentioned mostly self-inflicted problems: poor infrastructure, lack of skilled labor, and failure to implement policies that could attract sufficient investment. Even as India is making big business deals – with Apple just one high-profile example – the consistency and type of investments are worrying to some.
In recent years, a significant portion of foreign capital has flowed into the service sector rather than production, according to Deloitte. Inflows slowed in 2021 and, starting in 2020, India has fallen out of the top 25 in the Kearney FDI Confidence Index.
The Kearney Index measures the confidence of companies that invest in a particular market for a period of three years. 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 strong investor preference for developed markets over emerging markets,” said Terry Toland of Kearney. “This may indicate a perception of safety in developed markets in emerging markets.”
Modi is betting that the G20 presidency will create the right opportunity to change this perception and beat competition from other Asian economies such as Vietnam and Malaysia.
“2023 will be different, assuming there are no new unexpected shocks — global or local,” said Abhishek Gupta, chief Indian economist at Bloomberg Economics. “The country has pretty much created a structure already that will help kick-start the industrial recovery and boost industrialization,” he added.
Supporting friends, as allies invest in each other, and a broader pivot away from China could benefit India — though the speed of change is far from clear.
Anantha Nageswaran, India’s chief economic advisor, said, “There is a lot of inertia.” Leaving China, he said, is not an invitation that companies take seriously, because they have “invested a lot in a big market.”
However, East Asian countries will eventually face capacity constraints at some point. “So I think we need to wait for these things to happen,” Nageswaran said.
– With assistance from Anurag Kotoky, Swansy Afonso, and Sankalp Phartiyal.
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