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FDI in Manufacturing
Context:
The Minister of State for Commerce and Industry, Jitin Prasada gave the information in Parliament that Foreign direct investment (FDI) inflows in the manufacturing sector from 2014 to 2024 increased by 69% to $165.1 billion, compared to $97.7 billion in the previous decade (2004-14)
About Increase in FDI in Manufacturing:
Automotive Sector:
- FDI activity in automotive components has surged due to the rise in electric vehicles (EVs).
- The number of EV-focused OEMs increased from 479 in 2021 to 698 in 2023.
- Notably, Tesla partnered with Tata Motors in 2023 to co-develop EV technologies in India.
Space Sector:
- India’s relaxation of FDI rules in the space sector allows up to 100% foreign investment.
- This policy aims to boost employment and attract foreign investments for manufacturing and launch facilities, with startups like Skyroot Aerospace receiving backing from firms such as GIC.
Defense Sector:
- The automatic FDI route threshold in the defence sector was raised from 49% to 74% in 2020, with up to 100% permitted with government approval.
- This change has enabled significant foreign investments, including Swedish firm Saab’s approval for 100% FDI to establish a new facility in India.
Reasons For Increase in FDI:
- The government’s initiatives to attract FDI, including the Make in India campaign and the Production-Linked Incentive (PLI) scheme, have cultivated a favourable investment climate.
- Improved Ease of Doing Business: The implementation of GST has simplified taxation and reduced compliance burdens, while regulatory reforms and lower corporate tax rates have further enhanced the ease of doing business in India.
- Infrastructure Development: Significant investments in infrastructure, such as dedicated freight corridors and enhanced road and rail networks, have improved connectivity and efficiency in the manufacturing sector.
- Market Potential:India’s expanding consumer market, driven by a rising middle class and increasing disposable incomes, offers substantial opportunities for foreign investors in manufacturing.
- Realignment of Global Supply Chain: The COVID-19 pandemic underscored the need for diversified supply chains, thus under CHINA+1 Strategy leading companies are relocating or expanding manufacturing in India and other Asian countries to reduce dependency on specific countries.
- Technological Advancements: Foreign companies are investing in technology transfer and innovation in India, boosting local manufacturing capabilities and competitiveness.
- Strategic partnerships, like the Japan-India Make-in-India Special Finance Facility, also support investments and technology transfer, especially in the automotive and electronics sectors.
Impact of Increase in FDI in Manufacturing:
- Job Creation and Employment:Increased FDI is expected to double employment in the manufacturing sector, driving economic growth and facilitating technology and skills transfer.
- Reduced Import Dependency:Government initiatives have reduced import dependency, particularly in the mobile phone sector.
- Imports fell from ₹48,609 crore in 2014-15 to ₹7,674 crore in 2023-24, while exports surged from ₹1,566 crore to over ₹1,28,982 crore.
Challenges in Increase in FDI in Manufacturing:
- Skewed FDI inflow :Maximum FDI were concentrated in 5 sectors namely computer software & hardware (24.60%), services (12.13%), automobiles (11.89%), trading (7.72%), and construction (5.52%).
- Limited Geographical Spread: Karnataka, Maharashtra, Delhi, Tamil Nadu, and Haryana were the top five states receiving maximum FDI equity inflow.
- Procedural delays, bureaucratic layers, and numerous clearances required add to business costs and management time, causing concern for some investors.
- Lockheed Martin showed interest in setting up manufacturing operations in India’s defence sector around 2017, following the liberalisation of FDI norms.
- However, regulatory and bureaucratic challenges, such as navigating multiple approvals and local compliance, have delayed their investment plans.
- Factors like tariffs, import-intensity(sectors more dependent on import have received lesser foreign inflows) , and
- R&D intensity negatively affects manufacturing FDI in India :Increased FDI in the manufacturing sector is often associated with higher R&D intensity.
- As India has lower R&D intensity thus FDI inflows remain low.
- Tesla’s FDI plans in India have faced delays due to concerns about the nascent EV market, where battery-powered cars make up only 1.3% of total sales.
- High costs and insufficient charging infrastructure are significant barriers affecting Tesla’s investment strategy.
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Global Trends in Foreign Direct Investment (FDI) in Manufacturing
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Way Forward
- Digital Infrastructure: Invest in digital infrastructure to support Industry 4.0, enabling advanced technology adoption and enhanced manufacturing efficiency.
- Skill Development and Vocational Programs: Implement comprehensive skill development and vocational training initiatives in collaboration with industry players and foreign investors to ensure a skilled workforce for modern manufacturing.
Eg. Business Visa Portal: Launch a portal to streamline the approval process for short-term business visas for Chinese technicians, crucial for operationalizing production units and enhancing output under the Production Linked Incentive (PLI) scheme is an important step to provide skilled labour to boost manufacturing .