Whether or not Narendra Modi's ambitious "Make In India" campaign successfully draws foreign manufacturing to India, the proposed infastrucure investments will have a significant impact and lasting consequences for the subcontinent's supply chain.
The “Make in India” Initiative: A Growth Story of Potentials and Challenges
With newly elected Prime Minister Narendra Modi at the helm, India is seeking to emulate the success of Japan, China, and other “Asian Tiger” economies by doubling down on domestic manufacturing with its “Make In India” campaign. Launched on the eve of PM Modi’s landmark visit to the United States last year, the campaign seeks to encourage manufacturing in the country and attract international investors and industrialists. The ultimate goal of “Make In India” is to raise manufacturing’s contribution to the country’s GDP from 15 percent to 25 percent, bringing it more in line with other developing countries like China (31%) and Korea (35%).
PM Modi’s government is calling on all of India’s ministries related to manufacturing, from heavy industries to telecommunications, in a collective push to make the country more attractive and accessible to foreign investmentors. Currently India is ranked 139th out of 189 countries on the World Bank’s Ease of Doing Business Index. The proposed investments are largely focused on reinforcing — and in some geographies building — a reliable infrastructure to handle the supply chain challenges that will accompany a massive influx in manufactured goods.
“My definition of FDI is 'First Develop India' ”
— PM Narendra Modi
Though in its early stages, the campaign has already attracted notable participants. Electronics giants Samsung and Sony have recently announced plans to set up manufacturing bases in India. Samsung is reportedly establishing manufacturing units in the country to produce smartphones and tablets, with investments estimated to be between US $500M and US $1B, while Japanese multinational conglomerate Sony is launching an Indian manufacturing unit “very soon,” according to Sony’s Indian operations head Kenichiro Hibi. China’s Ambassador to India Le Yucheng has also said that Chinese firms are expressing interest in setting up manufacturing facilities in India; Chinese e-commerce conglomerate Alibaba Group has already made commitments to serve the Indian market.
The Caution and Challenges of Becoming a Global Export Powerhouse
As the “Make in India” campaign begins to pick up steam with foreign investors, international analysts are beginning to voice concerns about how high the ceiling really is for domestic Indian manufacturing and the export economy. Aashish Mehta, associate professor at the Global and International Studies Program at the University of California, Santa Barbara, cautions that “the sweeping changes in labor laws, land rules, environment regulations, and education policy unleashed by the government come with significant social costs and ultimately may not result in enough good jobs.” He cites the reality that mechanization and greater competition from other developing countries should also be taken into consideration. If the economic climate surrounding “Make In India” changes, foreign companies will be sure to relocate quickly. “Investors seem to get this short-termism,” Mehta quipped. He acknowledges the vital importance of having a solid manufacturing base but adds that, “It is just too costly to get wrong.”
Indeed international and domestic factors may conspire to scuttle Modi’s high hopes for “Make In India” over the next decade. Large scale manufacturing pushes like “Make In India” require a young population willing to work long hours on factory floors. The population of workers aged 15–24 in India and the other BRIC countries is projected to fall by 61 million by 2030 and the over-65-year-old population is expected to rise almost 50% by 2020. Foreign manufacturing companies are more likely to set up shop in other fledgling economies like Indonesia and Mexico where the population of young people is projected to grow rapidly.
Irrespective of the ultimate outcome of Modi’s “Make In India,” the nature of the subcontinent's supply chain is guaranteed a makeover. The urgency behind Modi’s infrastructure initiatives will inspire rapid expansion and hardening of the nation’s freight transportation network to accommodate the projected increase in traffic. India’s national railway budget was approved earlier this year and included expansions to the nation’s total rail freight capacity by 50% to 1.5 billion tons per year.
The supply chain makeover is a much needed one for India. The 7th largest country in the world in terms of land area presents a unique logistical challenge for domestic and international manufacturers. Before any of the planned and proposed improvements to India’s infrastructure and domestic bureaucracy are enacted, those considering business involving the Indian supply chain should consider several factors:
A 2014 World Bank survey ranked India 46th in global trade logistics performance, placing it behind some of its biggest competitors for foreign manufacturing investment like Mexico and Turkey
Planned domestic infrastructure improvements will be costly, especially freight rail expansion — expect those costs to lead to higher freight tariffs
Perishable and cold supply chains face a 20% spoilage rate on average due to inefficiencies in India’s domestic freight infrastructure*
India is approximately two weeks farther from the United States by shipping line than China
Frequent power outages may cause delays in manufacturing schedules and an increased likelihood of defective parts
The Indian bureaucracy itself poses a challenge: government processes are complex and confusing, and have the potential to cause further delays and frustrations
India lacks a developed supply base: raw materials and parts are still often imported for production
The import process to the country remains complicated and non-standardized, causing higher than normal requirements for inventory to offset unpredictable delays
The lingering question remains: will Modi’s many infrastructure investments bear fruit in time to attract enough foreign manufacturers to call “Make In India” a success? As the country enters into this period of rapid industrial growth, the already struggling logistical performance of India is almost guaranteed to suffer in the short term . Public works projects on existing rail lines and roads are sure to cause delays in an already heavily backlogged transportation system. Congestion at major ports is also likely to worsen due to an inability to quickly acclimate to increased traffic as more international manufacturers move to India. Until India begins to see returns on its domestic investments, the unavoidable headaches, bureaucracy, and delays that come from gambling on the Indian Supply Chain threaten to eliminate any savings foreign manufacturers may see from moving to India.