Make in India: This is why more and more foreign companies are manufacturing in India

India’s economy has developed atypically over the past 30 years. Usually, countries develop agriculture first, then manufacturing and then services, but India is taking that route the other way round. From the moment India opened its economy to the outside world in 1991, the country became a hotspot for software development and business process outsourcing. Services, in other words. Meanwhile, India’s agriculture and manufacturing industries lagged far behind. In the 2013-14 financial year, India’s manufacturing industry even showed negative growth.

Reason enough for the Indian prime minister to launch a massive Make in India campaign in 2014 with the aim of transforming India into an attractive manufacturing country. By eliminating unnecessary laws and regulations and all kinds of incentives, India wants to attract international companies to come and produce in India. The aim is to create jobs, especially for unskilled Indians.

‘I want to tell the people of the whole world: Come, manufacture in India,’ Prime Minister Modi said during his Independence Address on 15 August 2014. ‘Come and manufacture in India. Go and sell in any country of the world, but manufacture here. We have skill, talent, discipline and the desire to do something. We want to give the world an opportunity to come make in India.’

Why manufacturing in India is an interesting option

Apart from the reforms and incentives discussed in more detail below, Indian ministers and officials leave no opportunity to emphasise how interesting it is to produce in India. In doing so, they naturally point to the abundance of labour which, even compared to China, is cheap. India’s young workforce-the average age is 27.6 years-which is relatively well-educated and English-speaking is also seen as an important argument for attracting foreign manufacturing companies to India. Finally, unlike China, India is known for its high-quality manufacturing.

Eased FDI laws by Make in India

The Make in India campaign covers as many as 25 sectors: automotive, aerospace, chemicals, IT & Business process management (BPM), pharmaceuticals, construction, defence manufacturing, electrical machinery, food processing, textiles and apparel, ports, leather, media and entertainment, wellness, mining, tourism, railways, automotive components, renewable energy, biotechnology, space, thermal energy, roads and highways and electronic systems. So pretty much everything.

Foreign investors looking to invest in any of the above sectors no longer need permission from the Reserve Bank of India and/or the Indian government. This is known as the automatic route for FDI, as opposed to the approval route for which specific permission has to be obtained. The automatic route obviously saves companies a lot of time and bureaucratic hassle.

Besides the relaxed FDI laws, the Indian government has introduced numerous other reforms to attract foreign manufacturing companies to India, such as eliminating the minimum capital requirement for start-ups, the introduction of online portals (such as eBiz, Sharam Suvidha), shorter and digital procedures for starting a business and the introduction of e-visas.

In addition, several laws have been passed in recent years that benefit almost all sectors. For instance, the Goods & Services Tax Bill and the Direct Taxes Code Bill lead to more transparency and uniformity for foreign investors. But the most important law in this regard is the Land Acquisition Bill that promotes the twin goals of social justice and industrial development.

Make in India incentives

The Indian government is not only making it easier to manufacture in India, but also cheaper. Here are some of the incentives:

• Sector-specific incentives: To encourage electronics manufacturing in India, the central government offers a subsidy of up to 25 per cent for a period of 10 years.
• The government provides an additional depreciation allowance of 15 per cent for manufacturing companies that invest more than 1 billion rupees (nearly $15 million) in plants and machinery.
• There are various incentives under the Income Tax Act, including, for example, deductions equal to 30 per cent of additional wages paid to new regular employee employed by a company with more than 50 employees.
• Export incentives: Under the foreign trade policy, exports are provided with various incentives such as duty drawback, tax remission schemes on inputs used in the export product, etc.
• State-level incentives: each state offers specific incentives for industrial projects. Some of the states also have separate policies for different sectors and special incentive packages for mega projects.

Manufacturing hubs

The manufacturing hubs below have attracted major foreign companies in recent years:

• Greater Noida (Uttar Pradesh)

India’s best car manufacturing hub. Its location and connectivity, on the outskirts of the capital New Delhi, has attracted major international companies such as Yamaha, Honda Siel Cars and LG Electronics India.

•  Nashik (Maharashtra)

Located about a three-hour drive northeast of Mumbai, has electrical engineering and auto-components industries. This location is well connected with two roads and runways, but does not have an airport.

•  Manesar (Haryana)

About an hour’s drive southwest of New Delhi. Manesar is a favourite auto parts manufacturing centre. It is well connected by roads and railways. Infrastructure reform is underway to increase production capacity.

• Hospet (Bangalore)

Located in southern India about a five-hour drive north of Bangalore. Hospet is a major centre for steel and iron production. The city has recently attracted huge investments that will undoubtedly increase its production capacity.

•  Aurangabad (Maharashtra)

Located about a six-hour drive east of Mumbai is the manufacturing hub for major pharmaceutical companies.