New Moves to Boost “Make in India” and Potential Pitfalls

Since September 2014, the Government of India has been carrying out a manufacturing industry promotion campaign under the slogan “Make in India,” and implementing reforms to improve the business environment in various fields. However, India’s manufacturing industry has not developed at the pace expected by the government because of the following reasons: 1) temporary economic and social turmoil associated with bold institutional reforms, 2) restrictions on economic activities and the economic downturn caused by the COVID-19 pandemic, and 3) the stagnation of reforms on land and labor, which are important production factors for manufacturing. Against this backdrop, the government is trying to shore up manufacturing industry by tightening import regulations and expanding subsidies. As a result, industrial clusters have been developed in smartphone manufacturing. However, considering the following three points, it is unlikely that a similar trend will spread to the entire manufacturing sector.

First, stricter import regulations will reduce the competitiveness of assembly-type export industries. With its proximity to China and the signing of the Regional Comprehensive Economic Partnership Agreement (RCEP), the ASEAN region has attracted more attention than India as a hub for exports to Europe and the United States, replacing China. India’s tightening of import regulations will strengthen the ASEAN orientation of companies and may slow the development of Indian manufacturing.

Second, there is the fiscal deficit problem. As various business challenges remain, in order for the government to attract foreign capital and develop manufacturing industry, mainly by providing subsidies, it is necessary to further expand the subsidy system, including raising the subsidy rate, expanding the scope of application, and easing the incidental conditions. On the other hand, the fiscal situation has deteriorated significantly due to the COVID-19 pandemic, and it is not easy to secure the budget necessary to expand the subsidy system. Once the COVID-19 crisis is brought under control, the government is expected to take a clear stance that fiscal consolidation is more important than boosting the economy, and pressure to cut subsidies will likely intensify.

Third, existing business challenges remain. As reforms to facilitate land expropriation stagnate, the issue of land expropriation will continue to hinder the construction of logistics infrastructure and factories. With regard to labor, even after the new law that integrates and simplifies several labor-related laws comes into effect, compliance with complicated state-specific regulations and strict regulations on dismissal will continue to be issues in the labor management of companies.

With the current impasse in measures to promote manufacturing industry, India will be forced to review its policies. It is expected that Japanese companies and the Japanese government will urge the Indian government to shift its policy toward economic liberalization and focus on reforms to improve the essential business environment, rather than further sharpening its current policy stance.

PDF link(PDF:415KB)