Harish Tyagi/EPA

Modi looks to boost US ties amid ‘Make in India’ manufacturing bid

Analysis: India is bidding for global firms to set up manufacturing bases in India, but there are roadblocks

New Delhi is hoping President Barack Obama’s three-day visit to India will help forge economic deals to spur India’s economy and help create jobs in the manufacturing sector, an initiative launched by Prime Minister Narendra Modi called Make in India.

Since the flashy Make in India launch in September of last year, Modi has invited global firms to set up their manufacturing bases in his country. In its drive to make India a global manufacturing powerhouse, it is focusing on 25 industries, including telecommunications, renewable energy and small cars. 

Obama on Monday was the first U.S. president to be a guest of honor at India’s Republic Day Parade, which celebrates the creation of India’s Constitution in 1950, and he is the only one to have visited India twice during his tenure.

"As two great democracies, two innovative economies, two societies dedicated to the empowerment of our people — including millions of Indian-Americans — we are natural partners,” Obama said at an appearance with Modi on Sunday. Obama cut short his trip to India to fly to Saudi Arabia on Tuesday to offer condolences to the family of King Abdullah, who died last week.

Modi and Obama have already announced a breakthrough in a deal that will allow U.S. companies to build nuclear power plants in India and the two were expected to make progress on defense deals and climate change. Obama also announced a partnership in $4 billion worth of investments.

‘No reason it can’t grow’

The Indian government says the new initiatives will "facilitate investment, foster innovation, protect intellectual property and build manufacturing infrastructure."

"One of the problems with the Indian economy is that while demand has grown, our capacity to supply has been restricted,” said Rajrishi Singhal, a senior geoeconomics fellow at the Indian Council on Global Relations. "That’s the structural friction resulting in high inflation and other issues in the economy." 

Modi has lobbied China, India’s largest trading partner, under the Make in India banner, with President Xi Jinping pledging $20 billion of investment over five years. Russia similarly has contributed, with President Vladimir Putin and Modi signing $100 billion worth of commercial deals in nuclear energy, oil and gas and defense. 

The rise of Russia and China is of concern to the U.S., but more important, Washington sees India, with its large population and a growing middle class, as a huge market. Obama took with him a delegation of more than 100 people, including leaders of some of America’s biggest companies, to attend meetings.

Bilateral trade has grown to $100 billion in the last decade. “We believe there is no reason it can’t grow another fivefold to $500 billion by 2020,” U.S. Ambassador to India Richard Verma said ahead of Obama’s visit.

Challenges to growth

India has successfully exported its IT-related services for years. But its cumbersome bureaucracy, overburdened infrastructure and desperate need for labor reform have prevented it from becoming a manufacturing hub.

As a central part of the Make in India campaign, Modi has said he is determined to change India’s reputation as a difficult place to do business.

He has overhauled labor laws requiring annual inspections, a process that attracted bribes for businesses to start, to function or even to be shut down. 

Power also poses a major challenge. India uses coal to generate more than two-thirds of its electricity. But it has been unable to meet rising demand, forcing the sector to rely on costly imports.  

Global companies have expressed concern about the country's poor industrial safety record, the impact on the environment and the state of its infrastructure. 

“Part of Make in India is to help investment in infrastructure,” Singhal said. ”But it’s not a silver bullet. And it needs time and vision and investment. That’s a problem, and the government is well aware of this problem.”

Singhal added that there needs to be a great deal more clarity on how foreign direct investment will work. Until now, foreign companies have been restricted from buying land in India. Moreover, the rules on taxation are unclear, and the U.S. continues to seek changes in India's rules on intellectual property rights. 

One of the major obstacles to growing India’s manufacturing sector is a lack of trained labor. The initiative aims to turn India — a nation replete with farmers, IT professionals and call-center employees — into a manufacturing hub. The government has pledged to provide manufacturing skills training to 500 million people by 2022.

However, many analysts remain skeptical of how far the promotional campaign can go.

“The concept of Make in India is not bad, but it depends how it is implemented,” IT expert and writer Achyut Godbole said. “Normally global industries will want to invest in large industries that require technology.”

For the IT sector, he said that the policy might lead to more manufacturing of hardware but that it will not help the software industry. He said a great deal of knowledge would have to be transferred to the country, and skilled work in India is not as cheap as it used to be, making it less economical for American companies looking to invest in innovation and advanced technology to take their industries to India.

“We are not producing enough products. Nothing close to Microsoft or Apple,” Godbole said. “And our salaries are only going up.”

Local businesses, however, are optimistic about the prospects of more foreign investment in India.

Mangesh Kulkarni supplies car parts to foreign brands like Volkswagen — contracts that make him about $160,000 a year. He said there is potential to expand his business to make products worth $2.4 million, but he lacks the tools, experience and knowledge.

He said that if U.S. companies go in and develop systems, many local businesses would benefit. “The government strategy has not benefited local business until now. But if the government supports us and makes it a policy, it will definitely boost our local economy,” he said. “It is survival of the fittest. Make in India is different from ‘made in India.’ But Make in India will boost the market because ultimately everyone needs financing.”

Much of the success of Obama’s trip to India is being attributed to the chemistry between the him and Modi. But TV-friendly optics don’t always translate into concrete improvements.

“There have been ties between the citizens of both countries, and ties between businesses have been strong, especially in industries like IT,” said Nishith Acharya, a senior fellow at public policy think tank the Center for American Progress. “It’s really the government to government that has been lagging.” 

The two leaders have agreed to meet more often and set up a hotline between their administrations.

Analysts say U.S. companies will need continued assurance that India is addressing some of the problems that have made trade and investment difficult in the past. But they have applauded gestures from both sides to enhance ties.

"India is the third-largest economy in the world,” Acharya said. “So it’s important for the world’s largest economy to have good relations with it.” 

Priti Khan contributed reporting to this article.

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