The Impact of FDI on India’s Manufacturing Sector

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By Ankit Shrivastava, Dezan Shira & Associates, Delhi

Feb. 11 – Foreign direct investment (FDI) has risen considerably in post-reform India. The work and category of FDI has changed significantly since India has opened up to world markets. This has fueled high prospect that FDI may serve up as a channel to advanced economic growth. However, it turns out that the development effects of FDI differ extensively across sectors. FDI stocks and production are equally reinforcing the domestic manufacturing sector.

India is ranked second in the world in terms of manufacturing capability, according to the “2010 Global Manufacturing Competitiveness Index’” by Deloitte Touche Tohmatsu and the US Council on Competitiveness. India’s workforce of scientists, researchers, and engineers, together with its English-speaking workforce and democratic regime, the report says, make it an attractive destination for manufacturers. In 2010, the indicator of the overall condition of the manufacturing sector has moved up to 126.5 for the appraisal quarter, its highest reading since the April-June 2007 quarter. In the last quarter of the year, the manufacturing industry showed positive results despite less than impressive performance in other sectors.

Growth in India’s manufacturing sector

Approximately 50 sectors in India’s domestic manufacturing sector grew by 39 percent during the April – December 2010 period, achieving the “excellent growth” category. These segments are air conditioners, natural gas, tractors, nitrogen fertilizers, ball bearings, electrical and cable wires, auto components, construction equipment, electric fans and the tire industry. Twenty-two segments entered the “high growth” group, registering a growth of 17.3 percent during the first nine months of the existing fiscal. Industries such as utility vehicles, crude oil, power transformers, energy meters, alcoholic beverages and textile machinery have registered around 10-20 percent growth.

Exports from Indian SEZs grew by over 68 percent (to US$12.55 billion) as compared to the corresponding period of 2009-10.  Floating by India’s reaction to its super-machines, iconic American superbike maker Harley Davidson is setting up an assemblage unit at Bawal, Haryana. This will be its second establishment outside the United States, after Brazil. Field Fresh, the 50:50 JV of Bharti Enterprises and Filipino firm Del Monte Pacific Ltd formed in 2007, has started its R&D and manufacturing unit at Hosur, Tamil Nadu, with an initial establishing cost of US$26 million.

Doosan Heavy Industries and Construction Co Ltd of South Korea has shown interest in setting up a power equipment manufacturing unit in Haryana to be fully owned by the overseas corporation. Pipavav Shipyard has signed a memorandum of understanding (MoU) with SAAB Dynamics AB, part of Sweden’s Wallenberg Group, for the manufacturing of products in the defense and aerospace sectors. Rieter Nittoku Automotive Sound Proof Products India Pvt Ltd, a joint venture between Rieter group of Switzerland and Nihon Tokushu Toryo Co Ltd of Japan, has invested US$15 million in a new unit at Oragadam, near Chennai. Nissan Motors and Nokia have already shown interest in increasing their unit size in India.

India is quickly rising as a worldwide manufacturing hub with a huge number of companies changing their manufacturing base to the country. Furthermore, India has the largest number of companies, outside of Japan, that have been recognized for excellence in quality. The government has issued the new “Consolidated Foreign Direct Investment Policy,” which came into effect April 1, 2010. The government is also planning to set up National Manufacturing and Investment Zones (NMIZs). Main objectives of these NMIZs are:

  • To promote investments in the manufacturing sector and make the country a hub for both domestic and international markets
  • To increase the sectoral share of manufacturing in GDP to 25 percent by 2022
  • To double the current employment level in the sector
  • To enhance global competitiveness of the sector

Reasons for Dissatisfaction

One of the main reasons for the dissatisfaction amongst foreign investors is procedural delays. The time-intense administration and compliance measures, the bureaucratic layers and the numerous bodies from which clearances are to be obtained all add up to considerable business costs and management time, creating an issue of severe concern for investors. Most investors feel that projects handled at the state level are disorganized and unstructured in comparison to the projects handled at central level. But it is evident now that some foreign investors show dissatisfaction in only some areas, whereas FDI inflow in the manufacturing sector is upbeat and encouraging.

A huge number of foreign direct investors (around 62 percent) stated that they were making profits in their current operations in India according to the FICCI survey. This is a cheering figure mainly when one views it in light of the fact that a large amount of companies that reported losses in their India operation (21 percent) belong to the category of firms that have been in service in India for less than 5 years. These results show that India is emerging as a lucrative destination in the long term.

Conclusion

In the post liberalization age, India has taken in a huge amount of FDI in a variety of sectors. The large market for computer hardware in India, coupled with the ease of use of skilled labor force in this sector, has boosted the FDI inflow. Soaring expansion prospects, in terms of increased utilization in India as well as increasing demand for exports, are expected to lead to even more FDI.

Ankit Shrivastava is with Dezan Shira & Associates’ Delhi office. The practice maintains five offices in India and assists with foreign direct investment into the country. For assistance please india@dezshira.com or download the firm’s brochure here.

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