Is Foreign Direct Investment coming to India going into the Make in India program?

Make in India initiative was launched to boost India’s manufacturing sector. The idea was to encourage Indian entrepreneurs as well as global supply chains to set up manufacturing units in India. Did the program succeed? Did Foreign Direct Investment come into India’s manufacturing sector? 

First of all, let’s have a look at the amount of Foreign Direct Investment that’s coming into India. Since the beginning of 2010s, as per the world bank data, India has received Foreign Direct Investment (FDI) in the vicinity of 30 to 40 billion US$ per year. 

In 2010, India received the FDI totaling 27.4 billion US$. In 2011, it was 36.5 billion US$. In 2012, it was 24 billion US$. In 2013, it was 28.15 billion US$. In 2014, it was 34.58 billion US$. In 2015, it was 44.01 billion US$. In 2016, it was 44.46 billion US$. In 2017, it was 39.97 billion US$. And in 2018, it was 42.12 billion US$.

However, FDI when measured as a percentage of GDP tells a different story. In 2010, India received FDI equivalent to 1.64% of India’s GDP. In 2011, this FDI number was 2% of the GDP. In 2012, it was 1.31% of India’s GDP. In 2013, it was 1.52% of India’s GDP. In 2014, it was 1.7% of the GDP. In 2015, it was 2.09% of the GDP. In 2016, it was 1.94% of the GDP. In 2017, it was 1.51% of India's GDP. And in 2018, it was 1.55% of the GDP. Therefore, FDI in terms of percentage of GDP has not changed much since the 2010s.

Having got the numbers for the FDI, Let’s now understand where this FDI is being deployed. In other words, which are the sectors that received the most of the FDI money. 

As per the data released by the Department for Promotion of Industry and Internal Trade (DPIIT), In the fiscal year 1 April 2019 to 31 March 2020, the services sector received the highest amount of foreign inflows at 7.85 billion US$. The computer software and hardware sector received foreign inflows worth 7.67 billion US$. The telecommunications sector garnered 4.44 billion US$ worth of foreign inflows. The trading sector got 4.57 billion US$ worth of foreign inflows. The automobile sector got 2.82 billion US$ worth of foreign inflows. It was followed by the construction sector at 2 billion US$. And then, the Chemicals sector received foreign inflows worth 1 billion US$. 

This has been the pattern of FDI in India since the 2010s. Therefore, as is clearly evident from the above data, the manufacturing sector continues to lag behind even when it comes to garnering the FDI. And there is no surprise, since the launch of the Make in India program in 2014, India’s trade deficit with China has increased as shown in the graph below. If FDI was going into the Make in India program, then, surely, India's trade deficit with China would not have increased so much from the 2014 to 2018 period.

Year	India's exports to China in Billion US$	India's Imports from China in Billion US$	Trade Imbalance in Billion US$
2014	16.41	54.24	-37.83
2015	13.39	58.26	-44.87
2016	11.75	59.43	-47.68
2017	16.34	68.1	-51.76
2018	18.83	76.87	-58.04
	(Source: General Administration of Customs, China)

Therefore, the question that needs to be asked is why hasn’t India’s manufacturing sector been able to receive the FDI?

There are many reasons for it. However, the principal reason is the lack of manufacturing infrastructure in the country. Even though the Make in India project was launched in 2014, however 6 years down the line, the manufacturing sector still lacks the necessary manufacturing infrastructure. 

Point to be noted here is that the manufacturing infrastructure is different from the roads, ports, electricity, railways which fall under the category of physical infrastructure. Manufacturing is a long and hard game, and it needs state support in terms of high-quality manufacturing infrastructure. With the presence of manufacturing infrastructure, the local entrepreneurs would become manufacturers instead of becoming traders. Once the manufacturing infrastructure is in place, the global supply chains will also start to move to India. No one will have to persuade them to come to India and set up plants in India. They will set up plants on their own. Build the necessary manufacturing infrastructure and local entrepreneurs as well as global supply chains will be tempted to manufacture in India.

Indian businesses won’t be importing simple common household goods from China. Instead, these goods will be produced in India. And after having served the Indian market, the Indian entrepreneurs will be encouraged to export globally-competitive goods to the USA, Latin America, and Europe.

Therefore, it’s high time, Indian policymakers first identify the need to develop the manufacturing infrastructure in the country. And then develop that manufacturing infrastructure. Make in India policy must involve manufacturing entrepreneurs in the formal policy-making roles so that a necessary impetus can be given to building the manufacturing infrastructure on a war footing.

What are some items that are mostly imported from China but can be profitably manufactured in India itself?

Let’s first understand the current situation of manufacturing in India by analyzing the data. As per the world bank data, despite the launch of Make in India program in 2014, India’s manufacturing output in 2018 was 403 billion US$. Point to be noted is that in 2018, China's manufacturing output was 10 times the size of the Indian manufacturing output. In 2018, Chinese manufacturing output stood at a massive 4.003 trillion US$.

Now, let’s again come back to India. Out of this 403 billion US$ of manufacturing output, nearly 50% is generated by the auto sector. Therefore, if we take out the auto sector, then, despite the initiation of the Make in India policy in 2014, India’s manufacturing output in other areas is minuscule for a country with a population size of 1.35 billion.

Therefore, we end up importing simple common household goods from China. Goods like toys, plastic goods, Diwali Lights, electrical items, electronic items, souvenirs, etc. etc. The list of products that we import from China is endless thereby resulting in a massive trade deficit of 60+ billion US$ with China. That’s huge, 60+ billion US$ means approximately 4.5 Lacs Crores Rupees on a yearly basis. If we make all these goods in India itself rather than importing these goods from China, then, that surely will generate Lakhs or Crores of jobs in the country. So, why are not we making these simple common household goods in India given that the very purpose of the Make in India campaign was to boost India’s manufacturing? What is the problem?

Let’s understand this by taking a simple item like a plastic toy that is sold in India but is made in China. Why don’t Indian manufacturers make these simple plastic toys in India itself? To answer this, let us first understand the technical aspects of toys. A typical plastic toy comprises a shape (it could be an animal form, or doll, or human form, etc.). Once the shape or form is defined, then, battery or other accessories are fitted in the toy. It’s so simple and basic.

Now, let’s get going. To make the shape or form of the toy, an Indian manufacturer, or any manufacturer across the world would have to first develop the mold of that shape or form. This is the first step. Well, the first step is the 3D design in the computer, but the first real manufacturing step is the development of the mold to get the shape or form of the toy that we want to manufacture. This mold development step in India takes at least 5-6 times more time than what it takes in China. The Make in India program too failed to focus on these simple basic technical aspects of manufacturing in India. So, when mold development takes a huge amount of time, then, it is clearly understandable that the cost of the final product will rise. Besides the cost, the quality of the mold produced is inferior to what is produced in China. Now, when the shape or form of the toy is not only expensive to make in India but also inferior in quality, then, who will buy the final toy? Therefore, instead of making a simple plastic toy in India itself, our entrepreneurs have no choice but to bring the same toy from China and then sell that toy in India.

The second step in the manufacturing of this toy is getting the other parts. Parts such as the battery, and other accessories. It is true, we have to source these parts from other vendors. And since, when we ourselves are facing the challenges in manufacturing the shape or form of the toy in India, then, it is given that other manufacturers are also facing the same challenges to manufacture batteries and other accessories in India. The Make in India policy framework does not support bottom-up manufacturing and therefore all small scale entrepreneurs and MSMEs face similar challenges. Therefore, even if we are able to develop the shape or the form of the toy, then, it is inevitable, we will end up sourcing some parts from China. Maybe a battery or maybe other accessories. But surely, we would have to rely on China.

The third step is ‘assembly’. Now that you have the mold to make the shape or the form of the toy. And you also have the other necessary parts to make the complete toy. The next step is the assembly. Automating the assembly line would require a huge amount of money, therefore, a small scale entrepreneur or the MSME that decides to make the toys in India would deploy manpower to do the final assembly of the toy. However, manpower in India is not properly trained, therefore, it can take months before the assembly line is perfectly fine-tuned. And no entrepreneur in India wants to wait for months before getting the desired high-quality toy. Therefore, most people would instead bring goods from China and then sell them in India. The Make in India initiative does not give the right tools for entrepreneurs to make goods in India itself.

Therefore, unless and until Make in India policy focuses on boosting and promoting small scale entrepreneurs and MSMEs, we would continue to source simple common household goods from China. Entrepreneurs shall be involved in the final draft of the Make in India policy. The policy shall encourage India’s entrepreneurs and MSMEs. The current policy only focuses on attracting global companies to India. And no global company makes simple common household goods. These simple common household goods can only be made by Indian entrepreneurs and MSMEs. But at the moment, there is no policy support to these entrepreneurs and MSMEs. And therefore, we continue to source simple common household goods from China.