Category: Macro

Last month, Narendra Modi celebrated the 10th anniversary of the Make in India programme by mobilising data which are contradicted by all statistical sources – Indian as well as non-Indian. By creating such a misleading impression, the prime minister of India makes course correction even more complicated, while the industry of the country has become more dependent of China than ever.

 In 2014, with ‘Make in India’, Modi’s aim was to achieve four objectives:

(1) to increase the growth rate of Indian industry to 12-14% per year;

(2) to create 100 million industrial jobs by 2022;

(3) to increase the share of the manufacturing sector to 25% of GDP by 2022 (a deadline shifted to 2025 a few years later); and

(4) to make India the ‘new factory of the world’, taking over from China by moving up the value chain.

Over 25 sectors of Indian industry were involved in this project.

Ten years later, not only have these objectives not been reached, but the situation has deteriorated.

Illustration: Pariplab Chakraborty.

The growth rate for industry is far from double figures: since 2014 it has averaged around 4%, with manufacturing even below this level. So much so that the share of manufacturing in GDP, far from having increased, has continued to erode, falling from 18.3% to 14.72% of India’s Gross Added Value between 2010-11 and 2019-20, before the COVID-19 crisis.

Two years after the crisis, this proportion had fallen to 14.70% in 2022-23, the lowest figure since 1968-69. And far from creating the 100 million jobs expected, industry has lost many jobs, with the number of manufacturing workers falling from 51.31 million in 2017 to 35.65 million in 2022-23, a fall partly linked to the COVID-19 crisis, which caused the number of manufacturing workers to fall to less than 30 million in 2021. Between 2016-17 and 2022-23, the manufacturing sector lost almost 1 million workers. 

This failure is partly due to foreign direct investment (FDI). The Modi government hoped to attract enough FDI to replicate China’s development strategy and become a manufacturing base for the rest of the world, given India’s low labour costs. Indeed, FDI has risen from $36 billion a year in 2014 to almost $85 billion by 2022. But this success needs to be put into perspective from two points of view. 

First, only a fraction of them – smaller and smaller since 2018-19 – can be considered as productive investments: out of more than $ 80 billion in FDI in 2020-21, only $ 21 billion fell into this category, or 3.1% of the countries gross capital formation. In 2018-19, the peak-year, productive FDI accounted for no more than 6.5% of gross capital formation. 

Secondly, to measure the real weight of FDI, we need to relate it to GDP. From this angle, the picture is different: as a percentage of GDP, FDI will account for an average of just 1.76% of Indian GDP over the period from 2014-15 to 2022-23, compared with an average of 2.14% of GDP over the previous decade, from 2007-08 to 2014-15. 

Thirdly, FDI has been declining significantly since 2022. It fell to just over $71 billion in 2022-23 to just over $10 billion in 2023-24, a fall of 60%. This is the lowest figure since 2007, when FDI accounted for just 0.7% of GDP, a record in independent India. These figures are counter-intuitive, as a series of massive, well-publicised investments created the impression that India was benefiting from a process known as ‘decoupling’ in the US and ‘de-risking’ in Europe, whereby Western firms that had invested heavily in China were partly withdrawing from that country for both economic and political reasons in order to diversify their FDI. But India does not benefit as much as other countries in the Indo-Pacific region – starting with Vietnam – from these flows. 

Fourthly, the majority of FDI since 2017 has been concentrated in some nine sectors, starting with services (especially IT), while 53 other sectors – mainly manufacturing – have received just 30% of total FDI.

Finally, the Make in India programme has failed to increase India’s merchandise exports, which have fallen steadily over the last 10 years, from 10.2% of GDP in 2013-14 to 8.2% in 2022-23. If the Indian industry fails to export more – in relative terms – it imports more, mostly from China.

To supplement the Make in India programme, the Modi government, since 2020, promotes production-linked incentives (PLI). The aim is to help investors operating in key sectors and to promote cutting-edge technologies to improve the international competitiveness of Indian firms. 

The cost of these PLIs to the state raises the question of both the sustainability of such an effort and its relevance, since such expenditure naturally comes at the expense of other items in the state budget. The issue is particularly sensitive when the government comes to the aid of large firms. The microprocessor factory that the American manufacturer Micron set up in Gujarat – which made the headlines in the media – represented an investment of $ 2.75 billion, of which Micron only covered a small part ($ 825 million), the ‘rest’ financed by the governments of New Delhi and Gandhinagar. More importantly, so far industrial investments remain rather low.  

Industrial investment at a standstill   

The rate of productive investment (Gross Capital Formation), after growing significantly in the 1990s and 2000s, has tended to weaken structurally: it fell from almost 42% in 2007 to 29% in 2020. It has risen to 34% by 2023, but this is still far from the what it was.

This curve is all the more worrying in that it is largely explained by the slump in private investment. The rate of private investment fell from 31% in 2011 to 23% in 2020, and although it has since recovered, it remained at 27% in 2022. Investment in the manufacturing sector has fallen particularly sharply, from 6.1% of GDP to 4.2% between 2011-12 and 2021-22. 

How can we explain the relative collapse in private investment?

Weak demand is a major factor here. Companies in the manufacturing sector are often faced with unused production capacity, making it unnecessary to expand their industrial facilities. Between 2011 and 2021, in 10 years the production capacity of Indian factories remaining idle rose from 18% to 40%, an extreme situation linked to the COVID-19 crisis. From 2022 onwards, this percentage stabilised to an average of around 25%, a far cry from the 2011 figure. The weakness of demand here stems from the thinness – or even the shrinking – of the middle class, whose consumption had, briefly, been one of the engines of growth in the years 1990-2000. 

What’s more, a closer look at the 2000s, the decade during which Indian growth flirted with double-digit rates, shows that investment was boosted not only by attractive real interest rates, but also by expectations that ultimately failed to materialise: the development model that India adopted in the 1990s encouraged the growth of inequality so radically that only a small minority of Indians really benefited. Since the turn of the century, there has been a spectacular increase in inequality, with the share of national income held by the richest 10% rising from 34.4% in 1990 to 57.1% in 2018. At the same time, the share of the same national income held by the poorest 50% fell from 20.3% to 13.1%. Admittedly, the national income has increased significantly in the meantime, but part of the middle class has nonetheless been impoverished, making certain consumer goods inaccessible. In fact, in 2017-18, for the first time since the 1970s, the National Sample Survey Office recorded an increase – albeit very slight – in the number of people living below the poverty line, from 21.9%  in 2011-12 to 22.8 % in 2017-18.  

The rich India cannot offer a sufficiently large and stable market to convince industrialists that they should invest. Nearly 800 million Indians are now eligible for food aid, a tangible indication of the narrowness of the market of solvent consumers. 

The low purchasing power of Indian consumers can be seen in the fall in the savings rate, which in 2024 was 5.3% of GDP, the lowest level since the 1970s. At the same time, households are taking on more debt, with loans taken out in 2023 representing 5.8% of the GDP, another near-record since the 1970s.

The low level of household savings is depriving banks of the resources they could use to lend to businesses, which are therefore seeing their potential investment projects thwarted even further. But if banks are not lending easily to businesses, it is also because their balance sheets have been burdened by Non Performing Assets, bad debts – those held with companies that cannot repay because they have not been able to make their investments profitable in the 2000s. At that time, unreasonable confidence in the future led to massive investments that were not paid for, leaving the banks very vulnerable. As a result, banks were very reluctant to lend to potential investors.

A final reason why Indian industry is currently struggling is its lack of competitiveness in relation to its Chinese competitors. As India has opened up its market as part of its liberalisation policy, it has allowed Chinese manufacturers to penetrate entire sectors of its economy.

Depending on China’s industry

In 2024, with $118 billion in merchandise trade, China once again became India’s leading trading partner, supplanting the United States, which had overtaken it for two fiscal years. At the same time, India’s trade deficit with China has widened from $ 46 billion in 2019-20 to $ 85 billion in 2023-24. India’s exports – worth just under $17 billion, less than in 2018-19 – consist mainly of raw materials (including iron ore) and refined oil, while China’s exports to India, worth over $101 billion (compared with $70.3 billion in 2019), consist mainly of manufactured goods, including machine tools, computers, organic chemicals, integrated circuits and plastics. 

While India produces almost half its electricity from coal, the country is relying heavily on solar energy to achieve its energy transition – but it is not producing enough panels to meet its needs, far from it. As a result, two-thirds of photovoltaic cells and 100% of wafers (the essential components of these cells) are imported. Overall, China supplies India with between 57% and 1000% of the components it needs for its solar panels. In the first half of the 2024 fiscal year, Indian imports of Chinese solar panels amounted to more than $ 500 million, to which must be added 121 million in imports from Hong Kong and $ 455 million in imports from Vietnam. In addition, during the same period, China sold 500 million photovoltaic cells for assembly – while Malaysia sold India $ 264 million and Thailand $ 138 million, figures that testify to India’s dependence on its foreign suppliers in this field. Although Indian companies are entering the market, they are not developing their own technology, but importing 70% of their equipment from China. India is increasingly resorting to non-tariff barriers to limit Chinese exports, but these are likely to be in vain if Indian manufacturers do not acquire the appropriate technologies.

The same problem can be found in the pharmaceutical sector, one of the flagships of the Indian economy thanks to the boom in generic drugs. A world leader, India accounts for 20% of the sector’s global exports, worth over $ 25 billion. However, the sector’s Achilles heel is once again a lack of research and development – not only have Indian companies often contented themselves with copying molecules, but they have also failed to invest in the development of active ingredients. Before the COVID-19 pandemic, two-thirds of the volume of active ingredients came from China. The government tried to encourage manufacturers to innovate in this field by subsidising their research and development to the tune of $ 2 billion. A few years later, despite this government stimulus, the situation remains largely unchanged, with Chinese inputs enjoying unbeatable competitiveness.     

Ten years after the launch of the Make in India programme, India’s industry problem has deepened. Not only does this setback pose a threat to national sovereignty of the country vis-à-vis China, but without a proper industrialisation process, the country will not be in a position to give any work either to the 10 million young men and women who enter the job market every year, or to those who would like to leave agriculture. The stakes are very high indeed.

Christophe Jaffrelot is research director at CERI-Sciences Po/CNRS, Professor of Politics and Sociology at King’s College London and Non Resident Fellow at the Carnegie Endowment for International Peace. His publications include Modi’s India: Hindu Nationalism and the Rise of Ethnic Democracy, Princeton University Press, 2021, and Gujarat under Modi: Laboratory of today’s India, Hurst, 2024, both of which are published in India by Westland.