May 2024 / India

As India strives to become a $35 Tn economy, the role of the manufacturing sector is pivotal in driving the nation forward. A robust manufacturing industry is essential for boosting economic growth by contributing to the GDP, strengthening infrastructure, increasing imports, and creating job opportunities.

From fiscal year 2006 to 2012, India's manufacturing sector GDP grew by an average of 9.5% per year. However, over the following six years, growth slowed to 7.4% because of challenges like project delays due to cumbersome regulations and red tape, ill-targeted subsidies, low manufacturing base, low-value addition in manufacturing, and the presence of a large informal sector.

To revitalise the manufacturing sector, the Make in India initiative was launched in September 2014 to fostering foster innovation, and position India as a global manufacturing hub by attracting domestic and foreign investment, building best-in-class manufacturing infrastructure, enhancing skill development, protecting intellectual property, and streamlining regulatory processes to create a conducive environment for businesses to thrive.

Foreign Direct Investment Over the Years 

Due to the sustained efforts of the government, during 2014-2023, Foreign Direct Investment equity inflow in the manufacturing sector increased by 55% to reach $148.97 Bn compared to $96 Bn in the previous nine years (2005-2014).

This achievement is due to the various policy initiatives taken by the government over the years. Under the  existing FDI policy, nearly all sectors allow for 100% FDI, except for certain prohibited sectors. The defence industry allows 74% FDI under automatic route and 100% under the government route. For the broadcasting sector, FDI limits vary, differing between print and digital media.  While the automatic route requires no approval from the Government of India for either non-resident or Indian companies, the government route necessitates prior approval from the Government of India before investment can proceed.

The government introduced several other measures, such as the Goods and Services Tax (GST), to streamline indirect taxation. Before GST, manufacturers faced challenges with multiple tax filings and assessments by different tax authorities. The introduction of GST streamlined indirect taxation and automated tax compliances, easing the burden for businesses. Additionally, reductions in corporate taxes, along with simplified construction permits and and the abolition of archaic laws were implemented to improve the ease of doing business. Coupled with FDI policy reforms aimed at attracting foreign capital, these measures collectively aimed to bolster the business environment and stimulate economic growth.

At the global level as well, India also collaborated with other countries. To further propel innovation in manufacturing sectors, in 2015, India and Japan announced a $12 Bn 'Japan-India Make-in-India Special Finance Facility’ fund managed by the Nippon Export and Investment Insurance (NEXI) and Japan Bank for International Cooperation (JBIC). The fund “aims to promote direct investment of Japanese companies and trade from Japan to India, to support their business activities with counterparts in India, including the development of necessary infrastructure, and to help materialise Make-in-India policy of the Government of India.” Between 2000 and June 2023, Japan invested about $39.94 Bn in India, ranking fifth in FDI sources. Japanese investments mainly went into sectors like automobiles, electrical equipment, telecommunications, chemicals, finance (insurance), and pharmaceuticals.

Similarly, ‘Make in India Mittelstand (MIIM),’ a collaboration between India and Germany, focuses on driving innovation and enhancing economic cooperation by encouraging small and medium-sized German companies to invest and manufacture in India. Since its inception in September 2015, as of August 2021, the MIIM program has supported more than 151 German Mittelstand companies, resulting in a total declared investment exceeding €1.4 Bn. A majority of these investments came in the automotive, renewables, construction, consumer goods, electronics and electricals, chemical, waste/ water management sectors.

These liberalised policies, coupled with efforts to improve the ease of doing business, have positioned India as an attractive destination for foreign investors.

India's progress has been recognised internationally, with the World Bank's 2019 Ease of Doing Business report acknowledging a significant jump to a rank of 63 among 190 countries.

Current Landscape 

The Government has also introduced the Production Linked Incentive (PLI) Scheme, which has significantly boosted production, employment, economic growth, and exports in India. Under this scheme, companies are incentivise to promote domestic production, thereby enhancing India’s manufacturing competitiveness.  PLI scheme covers 14 key sectors with an incentive outlay of about $26 Bn. Sectors like Drugs and Pharmaceuticals (+46%), Food Processing Industries (+26%), and Medical Appliances (+91%) witnessed increased FDI inflows. The PLI scheme has prompted major smartphone companies like Foxconn, Wistron and Pegatron to shift suppliers to India, resulting in the manufacture of top-end phones in the country.

In line with the Make in India initiative, several Indian states have also launched their localised initiatives like Tamil Nadu Global Investors Meet, Make in Odisha, Vibrant Gujarat, Happening Haryana, and Magnetic Maharashtra.

According to the parliamentary data, from October 2019 to December 2023, the total foreign investments in the manufacturing sector, as reported by the States through FDI equity inflow, were $20.8 Bn. The top five states receiving the maximum investment are Maharashtra (29.6%), Karnataka (22.6%), Gujarat (16.3%), Delhi (13.5%), and Tamil Nadu (4.7%).

Conclusion

The Make in India initiative has been instrumental in transforming India's manufacturing landscape and attracting significant investments to the country through a series of reforms geared towards improving the ease of doing business, liberalising FDI policy and promoting domestic manufacturing, The COVID-19 pandemic also presented an opportunity for India to transform its economic landscape by leveraging the disruption caused by the crisis into a growth opportunity. As of 2023, the manufacturing sector accounted for 17% of the GDP and provided employment to more than 27.3 Mn individuals in India. The government plans to increase manufacturing's share to 25% of the economy by 2025.

India has emerged as an attractive destination for foreign investors. The success of the Make in India policy is evident from the substantial increase in FDI equity inflows in the manufacturing sector and increased production of high-value goods.

India's continued focus on innovation, technology adoption, and skill development will be crucial for sustaining the momentum in the manufacturing sector. Initiatives like the Production-Linked Incentive (PLI) scheme and ongoing reforms to improve infrastructure and regulatory environment will play a key role in enhancing India's competitiveness on the global stage.

Source: Invest India

India recently signed a landmark free trade agreement with the European Free Trade Association (EFTA). The historic signing of the India-EFTA trade deal was the successful conclusion of 21 rounds of negotiations spanning 15 years. The deal strengthens India’s plans to diversify its trade partners worldwide and enhances its export capabilities, foreign investments, and supply chain integrity.

Established in 1960, the EFTA, comprised of Iceland, Liechtenstein, Norway, and Switzerland, is an intergovernmental organisation promoting economic cooperation and free trade in Europe. The trade deal is slated to bring forth investments amounting to $100 Bn and a million direct jobs in India in the next fifteen years. India has offered 105 sub-sectors to the EFTA and secured commitments in 128 from Switzerland, 114 from Norway, 107 from Liechtenstein, and 110 from Iceland.

Government Initiatives Fostering India-EFTA Trade Deal

The Government of India has offered 82.7% of its tariff lines, which covers 95.3% of EFTA exports, to foster bilateral trade. The reductions in customs duty on goods imported from the EFTA countries are to help lower the prices of items like Swiss cheese, chocolate, wine, and other processed food products, along with watches, clocks, and more. Moreover, India has offered concessions on 105 sub-sectors, including accounting, IT, healthcare, etc. Concessions are expected to increase the nation’s services exports in the sub-sectors to the EFTA countries.

Concessions and policy support will help EFTA countries chart their journey in India with confidence and assurance. The deal would stimulate India’s services exports in sectors of its key strength, such as IT, business, personal, cultural, sporting, recreational, education, and audio-visual services.

Investment Opportunities Under India-EFTA Trade Deal

A distinctive and unprecedented element of the India-EFTA trade deal is the binding commitment on the part of the EFTA bloc to invest $100 Bn in India in the next 15 years. Investments will focus on manufacturing companies in India within industries like chemicals, pharmaceuticals, machinery, and food processing, which are some of the nation’s primary exports, along with service exports like IT services, accounting, and more. The investments are also to be directed towards infrastructural sectors.

The trade deal will strengthen India’s manufacturing & services infrastructure, spur innovation, create jobs and upskill the workforce. The deal will encourage domestic manufacturing in infrastructure and connectivity, manufacturing, machinery, pharmaceuticals, chemicals, food processing, transport and logistics, banking and financial services and insurance. The deal offers an opportunity to integrate India into EU markets. With over 40% of Switzerland’s global services exported to the European Union (EU), it is a compelling opportunity for Indian companies to make Switzerland their base to reach the EU market.

Enhanced Market Access for India & EFTA Members

The trade agreement is expected to enhance India's trade relations with Europe. Moreover, it is expected to improve market access for India and the EFTA bloc. As the vanguard of European countries to secure an FTA with India, the EFTA bloc now has market access to the nation that is estimated to become the fifth-largest consumer market across the globe by 2025. The agreement also benefits India, as exporters now have market access to Europe, especially those who manufacture and export within food processing, pharmaceuticals, and organic chemicals industries.

According to the agreement, the EFTA bloc is offering 92.2% of its tariff lines to Indian exporters. Rather significantly, the EFTA bloc offers 100% market access to India for non-agricultural products along with tariff concessions on Processed Agricultural Products (PAP).

Strategic Priorities of the Trade Deal

The trade deal, which focuses on foreign investments and bilateral trade, has prioritised tariff reductions and simplification of trade procedures between India and the EFTA bloc. This is specifically for high-value fish from Iceland and Norway, advanced chemicals, pharmaceuticals, machine equipment, and Swiss chocolate.

EFTA countries can now export processed foods and drinks, electrical machinery, and other engineering items to a market base of 1.4 Bn strong nations at low tariffs. Meanwhile, India is seeking foreign investments from EFTA countries in manufacturing companies (private and government-supported) along with mobility and market access to other European countries through the EFTA bloc.

The Future of Bilateral Trades for India-EFTA

The trade deal is expected to increase foreign investments from EFTA nations, with the Norwegian Sovereign Wealth Fund at their discretion and Switzerland’s existing trade interests in India. These investments and job creation opportunities are expected to ensure both revenue for India and stability for the country’s economy.

The agreement is also projected to boost bilateral trade in technology and knowledge in the manufacturing sector, including pharmaceuticals, food processing, automobiles, and more.

Conclusion

With a total population of 13 Mn, the EFTA countries are the tenth-largest traders of merchandise in the world and the eighth-largest providers of commercial services. Accounting for a combined GDP of $1 Tn when considering the population size would be staggering enough if it were not for their long-standing and illustrious history as trading partners in goods and services for the EU.

India’s free trade deal with EFTA puts the nation on the front foot towards its ascension to greater heights and success in international commerce.

Source: Invest India