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India has nurtured aspirations of becoming a global manufacturing leader for many years. However, a prominent initiative launched five years ago to propel this ambition has not met its primary objectives.
In 2020, the Indian government introduced a production-linked incentive (PLI) scheme aimed at attracting both local and foreign businesses to expand their operations in the country. This plan was part of the broader “Make in India” drive, which is designed to enhance India’s manufacturing capabilities.
With a financial commitment of 1.97 trillion Indian rupees (approximately $23 billion), the PLI program was intended to focus on 14 key sectors, including aerospace, automotive, electronics, pharmaceuticals, and textiles. Alongside other reforms, this initiative was expected to elevate manufacturing’s contribution to India’s gross domestic product (GDP) to 25% by 2025.
Despite these ambitious goals, the initiative has not yielded the expected outcomes. Recent data shows that manufacturing’s contribution to GDP fell to 14% in the fiscal year ending March 2025, down from over 15% when the scheme commenced.
Initially, the program aimed to generate production and sales worth 15.52 trillion Indian rupees, yet as of November 2024, that total reached only about 14 trillion Indian rupees.
Consequently, discussions about the future of the PLI scheme have emerged, with reports indicating that the government may allow it to expire due to disappointing results.
Many companies either struggled to initiate production or faced delays in subsidy payments, as indicated by government documents reviewed by Reuters.
In response to these concerns, India’s Ministry of Commerce and Industry released a statement that did not directly address the PLI scheme’s status but emphasized its effectiveness and the job creation it purportedly stimulated.
According to MCI data, 764 companies, featuring industry giants like Foxconn and Reliance Industries, signed on to participate in the PLI scheme, collectively investing around 1.61 trillion Indian rupees by the end of last year.
Systemic Issues
While the PLI scheme’s future is unclear, the challenges hindering India’s manufacturing ambitions require further examination.
Experts consulted by CNBC’s Inside India suggest that the difficulties in the manufacturing sector extend beyond the PLI initiative or the “Make in India” program as a whole.
Dhiraj Nim, a foreign exchange strategist at ANZ Bank, stated, “There was never a case that the PLI scheme would be effective across all 14 sectors. While it has seen success in select areas, India’s manufacturing landscape has faced constraints for an extended period.” He pointed out that historical policies created to protect domestic manufacturers inadvertently weakened their competitiveness compared to other global hubs.
Obstacles such as regulatory complexities, rigid labor laws, and challenges in doing business accumulate to potentially stifle growth in the manufacturing sector.
Furthermore, India has traditionally oriented itself more towards a services-based economy, which prioritizes technology and global operational roles rather than manufacturing. This shift has resulted in a workforce that may not possess the skills necessary to thrive in manufacturing environments. For instance, skill scarcity in the textile sector has hindered productivity, putting India at a disadvantage compared to other emerging markets like Bangladesh, Vietnam, and Mexico, which have more favorable labor costs.
Nim highlighted these structural challenges as longstanding issues that do not have straightforward resolutions.
Tailwinds
Despite the current challenges in its manufacturing sector, India holds a significant advantage: a demographic dividend characterized by a young and urban population with increasing disposable incomes. This trend provides an opportunity for businesses to cater to a burgeoning consumer base.
Multinational corporations are eager to establish a foothold in what is now the fifth-largest economy, spurring their interest in manufacturing within India. Anupam Singhal, global head of manufacturing at Tata Group-owned TCS Global, noted, “All major manufacturers are either in India or contemplating setting up plants here.”
Companies that previously exited India are also reconsidering their presence; Ford Motors is reportedly planning to reenter India with a new plant in Chennai.
Alongside favorable demographics, growing trade tensions across the globe, particularly between the U.S. and nations like China, have made India an attractive manufacturing hub. Samir Kapadia, CEO of India Index, noted, “Nobody can do business in China with the tariffs being implemented.” He emphasized India’s potential for cost-effectiveness and access to markets in sectors like consumer electronics and automotive manufacturing.
The Road Ahead
However, U.S. trade policies under President Trump’s administration pose risks for India, potentially diminishing its appeal as a manufacturing destination.
India is reportedly considering cutting tariffs on 55% of U.S. imports in an effort to protect approximately $66 billion in its exports to the United States, which could represent significant changes in tariff structures to safeguard its interests.
Dhiraj Nim remarked that while the immediate implications of U.S. tariffs on Indian exports might be manageable, they could substantially increase production costs, complicating employment levels within India’s industries.
Citing future prospects, India’s Commerce and Industry Minister Piyush Goyal stated that overall exports—including services—are projected to reach $2 trillion by 2030, a significant increase from $778.21 billion in the fiscal year 2023-2024. Efforts to boost these figures include tax rebates and forging more free trade agreements, such as those planned with European nations.
Currently, India is operating under 13 Free Trade Agreements, lagging behind other developing nations like Vietnam, which has established 17. Improved trade agreements could enhance India’s competitiveness in global markets, enabling both foreign and local firms to thrive.
Need to Know
India’s former commerce secretary emphasizes that the country should avoid unilateral concessions during trade negotiations with the U.S. Anup Wadhawan has urged that trade-related concessions should be carefully negotiated under the Bilateral Trade Agreement rather than granted arbitrarily. Currently, India and the U.S. are engaged in critical discussions ahead of scheduled tariff adjustments.
India is considering lowering tariffs on $23 billion worth of U.S. imports as part of efforts to protect its significant trade volumes with the United States. Reports suggest this reduction could represent the largest tariff adjustment the country has made in years.
The urgent need for decarbonizing India’s power sector has been highlighted. Researchers Radhika Kak and Varad Pande emphasize three strategies for achieving this goal: integrating renewable energy into the national grid, enhancing energy efficiency, and adopting decentralized energy solutions.
What Happened in the Markets?
The Nifty 50 benchmark index closed at 23,591.95 on March 27. This marks a 6.69% increase since the beginning of the month, although it has seen a slight decline of 0.17% year-to-date.
The yield on the benchmark 10-year Indian government bond was marginally lower at 6.596%.
On CNBC TV this week, Aditya Suresh of Macquarie Capital stated that he does not foresee a “meaningful rally” in India’s benchmark indices due to the “high expectations” surrounding earnings.
Meanwhile, Sanjeev Prasad from Kotak Institutional Equities has called for a reevaluation of valuation frameworks, indicating that traditional methods may no longer accurately reflect current market dynamics.
What’s Happening Next Week?
As the coming week unfolds, a variety of economic indicators will be released, including purchasing managers’ indexes from various countries and unemployment figures, which will provide insight into the resilience of factory and service sectors amidst global trade disruptions.
March 28: Consumer price index from Japan for March, U.K. retail sales for February, U.K. GDP data for Q4 2024, U.S. Personal Consumption Expenditure index for February.
March 31: Purchasing managers’ index from China for March.
April 1: U.S. and China manufacturing purchasing managers’ indexes for March, Japan’s unemployment rate for February, Reserve Bank of Australia’s interest rate decision, and U.S. ISM Manufacturing PMI for March.
April 2: India’s HSBC manufacturing purchasing managers’ index for March.
April 3: U.K. S&P Global PMI for March.
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