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Only 6% of FDI coming to India is for manufacturing. Where is govt going wrong?

Neeraj Thakur | Updated on: 10 February 2017, 1:50 IST
Good news
  • India has registered the highest-ever FDI flow into the country in the year 2015
  • It has received more FDI than the US and China
Bad news
  • Over 50% of this FDI is meant for the services sector, while only 6% is for manufacturing
  • This means that in the last one year since its launch, Make in India hasn\'t really succeeded
More in the story
  • Why is India trying to ride exports to success when global exports are falling?
  • The mistakes the govt has made in the last two years, and how it can rectify them

Over the last one year, the NDA government at the Centre has made a lot of noise about two things - Make in India and Foreign Direct Investment (FDI).

Now it's no secret that the Make in India campaign is designed to help India compete with China, the workshop of the world. And for that to happen, India needs foreign money to build up manufacturing infrastructure.

The Narendra Modi government's focus has been to attract FDI, in order to turn around the manufacturing sector, which currently contributes about 17% to India's GDP. China, on the other hand, has over 30% share of manufacturing in its GDP.

It has now been one whole year since Make in India was officially launched, and one would expect a huge amount of FDI would've flown into the country's manufacturing sector by now. But the data suggests otherwise.

FDI flows but not into manufacturing

India has registered the highest-ever FDI flow into the country, but the manufacturing sector has only got a 6% share of it. The services sector, on the other hand, has received more than 50% of the FDI that has flown into the country in 2015, according to official data by the Department of Industrial Policy and Promotion, and Citi Research.

India has seen the highest-ever FDI flow into the country, but manufacturing has received only 6%

In February, data released by the Secretariat for Industrial Assistance, which takes into account domestic as well as FDI proposals, showed that the country attracted investment proposals worth Rs 3.11 lakh crore in the manufacturing sector in 2015, as against Rs 4.05 lakh crore in 2014, a decline of over 23%.

The government would like us to believe that schemes like Make in India will show results after two or three years, and one should definitely be patient with the government's efforts. But at the same time, it makes sense to recall what RBI Governor Raghuram Rajan had said in his Bharat Ram Memorial Lecture. "The world cannot afford two Chinas," he had said.

The compulsion

India is betting on the idea of an export-led manufacturing sector at a time when global exports are falling.

The value of goods crossing international borders in 2015 fell 13.8% in dollar terms - the first such contraction since the global crisis of 2009.

India itself has not been able to arrest the decline in its exports for the last 16 months.

But India now has a 500 million-strong workforce, which is growing by 12 million a year. If the government fails to push the manufacturing sector, the demographic advantage that economists often talk about would be lost.

Where has the government faltered?

In its attempt to project India as the most favoured FDI destination, the NDA government went on a marketing spree all over the world. And no doubt it succeeded, as India became the nation receiving the highest FDI in 2015. But what the government could not sell to the world was its manufacturing sector.

Brokerage firm Emkay Global had punctured the government's euphoria back in October 2015, when it stated in a report: "The recent media hype over India surpassing China and US in FDI inflows is supposedly considered an affirmation of the success of 'Make in India'. However, data suggests that FDI inflows have centered on exploiting domestic consumption. Rather than stimulating domestic manufacturing, it is likely to have catalysed imports."

Every time questions have been raised over PM Modi's foreign trips, the government has used the FDI story to showcase its success. However, the reality is that the government has achieved nothing when it comes to the manufacturing sector.

The way forward

Over the last two years, the NDA government has launched many campaigns like Make in India, Digital India, Startup India and so on. However, while there have been loud marketing campaigns around all of them, the government seems to be lacking focus and research on its campaigns.

It is often observed that one government policy lies in complete contradiction with another policy. A prime example of this is the Commerce Ministry's decision to define the terms and conditions for FDI in the e-commerce sector.

The Commerce Ministry's conditions for FDI in e-commerce go against the Startup India campaign

The government has barred e-commerce companies from offering discounts if they are backed by foreign investors. It has also limited the share of business that an e-commerce firm can carry out with one supplier to 25%.

Startups are angry because of these conditions; they say it's unfair to first announce dozens of measures to promote startups, and turn around then clip their wings.

The government needs to come out of campaign mode, and introspect about the policies it has announced in the last two years. It must find the loopholes and contradictions in its policy decisions, because floating ideas is very different from implementing them.

It was the UPA government's idea to push India's manufacturing sector, and the NDA government needs to do much more than repackage and promote it as 'Make in India'.

Edited by Shreyas Sharma

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First published: 21 April 2016, 7:22 IST
Neeraj Thakur @neerajthakur2

As a financial journalist, his interface with the two dominant 'isms'- Marxism and Capitalism- has made him realise that an ideal economic order of the world would lie somewhere between the two.

Senior Assistant Editor at Catch, Neeraj writes on everything related to business and the economy.

He has been associated with Businessworld, DNA and Business Standard in the past.

When not thinking about stories, he is busy playing with his pet dog, watching old Hindi movies or searching through the Vividh Bharti station on his Philips radio transistor.