National University of study and

research in law, Ranchi

LABOUR LAW II
CONTINUOUS ASSESSMENT TEST - III

MAKING MAKE IN INDIA A REALISM

Submitted By: Submitted To:

Name Rakesh Kumar Sahoo Name Mrs. Mita Poddar

Roll No 342, Sec B (Assistant Prof.), NUSRL

Semester VIII Labour Law Faculty

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 Abstract

Make in India was launched by Prime Minister, Narendra Modi on 25 September 2014, to
encourage companies to manufacture their products in India. He has launched this ambitious
campaign with an aim to turn the country into a global manufacturing hub. This study
focuses on the changes in FDI rate after introduction of Make in India by Modi and growth
due to increase in the FDI rate. In August 2014, the Cabinet of India allowed 49% foreign
direct investment (FDI) in the defence sector and 100% in railways infrastructure. FDI
inflows before and after the MAKE IN INDIA campaign were compared using the
quantitative data which has been collected from various reports like Reserve Bank of India
Database on Indian Economy, database of department of Industrial Policy and Promotion. It
has been analysed that there is high correlation between Industrial Production and FDI
inflows. The effect of FDI on economic development ranges from productivity increased to
enable greater technology transfer. Authors have also studied the implications for Make in
India and realized that tougher task for India is to address competitiveness in non-cost
factors. To gain investor confidence and attract high FDI in the future, India would need to
fix its poor infrastructure through investment in highways, ports and power plants.

___________________________________________________________________________

Introduction

Indias economic reforms way back in 1991 has generated strong interest in foreign investors
and turning India into one of the favourite destinations for global FDI flows. According to
A.T. Kearney, India ranks second in the World in terms of attractiveness for FDI. A.T.
Kearneys 2007 Global Services Locations Index ranks India as the most preferred destination
in terms of financial attractiveness, people and skills availability and business environment.
Foreign direct investment (FDI) is a controlling ownership in a business enterprise in one
country by an entity based in another country. FDI is defined as the net inflows of investment
(inflow minus outflow) to acquire a lasting management interest in an enterprise operating in
an economy other than that of the investor. FDI usually involves participation in management,
joint-venture, transfer of technology and expertise.

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A foreign direct investment (FDI) is a controlling ownership in a business enterprise in one
country by an entity based in another country. It is of the following types:

Horizontal FDI arises when a firm duplicates its home country -based activities at the same
value chain stage in a host country through FDI. Platform FDI Foreign direct investment from
a source country into a destination country for the purpose of exporting to a third country.

Vertical FDI takes place when a firm through FDI moves upstream or downstream in
different value chains i.e., when firms perform value-adding activities stage by stage in a
vertical fashion in a host country.

FDI Stimulate the economic development of the country in which the investment is made,
creating both benefits for local industry and conducive environment for the investors. It
creates job and increase employment in the target country. It enables resources transfer and
other exchange of knowledge whereby different countries are given access to new skills and
technologies. The equipment and facilities provided by the investor can increase the
productivity of the workforce in the target country. FDI may be capital intensive from the
investors point of view and therefore sometimes high risk. The rules governing FDI and
exchange rate may negatively affect the investing country. Investment in certain areas is
banned in foreign markets, meaning that an inviting opportunity may be impossible to pursue.

Literature Review

Dunning (2004), in his study Institutional Reform, FDI and European Transition
Economics studied the significance of institutional infrastructure and development as a
determinant of FDI inflows into the European Transition Economies. The study examines the
critical role of the institutional environment (comprising both institutions and the strategies
and policies of organizations relating to these institutions) in reducing the transaction costs of
both domestic and cross border business activity. By setting up an analytical framework the
study identifies the determinants of FDI, and how these had changed over recent years.

Sunday et al. (2004), in their work Explaining FDI Inflows to India, China and the
Caribbean: An Extended Neighbourhood Approach find out that FDI flows are generally
believed to be influenced by economic indicators like market size, export intensity,
institutions, etc., irrespective of the source and destination countries.

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Klaus (2003), in his paper Foreign Direct investment in Emerging Economies focuses on
the impact of FDI on host economies and on policy and managerial implications arising from
this (potential) impact. The study finds out that as emerging economies integrate into the
global economies international trade and investment will continue to accelerate. MNEs will
continue to act as pivotal interface between domestic and international markets and their
relative importance may even increase further.

Boon (2001), in his study, Foreign Direct Investment and Economic Growth investigates
the casual relationship between FDI and economic growth. The findings of this thesis are that
bidirectional causality exist, between FDI and economic growth in Malaysia i.e. while growth
in GDP attracts FDI, FDI also contributes to an increase in output. FDI has played a key role
in the diversification of the Malaysian economy, as a result of which the economy is no
longer precariously dependent on a few primarily commodities, with the manufacturing sector
as the main engine of growth.

Dua and Rashid (1998), study for the Indian economy does not support the unidirectional
causality from FDI to Index of Industrial Production (IIP), wherein is taken as the proxy for
GDP. In fact, this study used the monthly data for IIP and GDP, which may include seasonal
component in its variation and hence it is required to de-seasonalise the data.

Alam (2000), in his comparative study of FDI and economic growth for Indian and
Bangladesh economy stressed that though the impact of FDI on growth is more in case of
Indian economy yet it is not satisfactory.

Sharma (2000), used a multiple regression technique to evaluate the role of FDI on the
export performance in the Indian economy. The study concluded that FDI does not have a
statistically significant role in the export promotion in Indian Economy.

The above result is also confirmed by the study of Pailwar (2001) and the study also argues
that the foreign firms are more interested in the large Indian market rather than aiming for the
global market.

Chakra borty and Basu (2002), by using a vector error correction model (VECM), tried to
find the short run dynamics of FDI and growth. The study reveals that GDP in India is not
Granger caused by FDI; the causality runs more from GDP to FDI and the trade liberalization
policy of the Indian government had some positive short run impact on the FDI flow.

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Sahoo and Mathiyazhagan (2003), also support the view that FDI in India is not able to
enhance the growth of the economy.

Objectives of the Study

1. To find out the effect of FDI on economic development after launch of Make in India
campaign.
2. To study about the role of FDI inflows and its contribution in increasing output.

Research Methodology

Keeping in view of the above objective, a study has been made on FDI inflows into the
country, sector-wise FDI inflows in the recent years, liberalization of FDI policies from time
to time. Also studied the concept of Make in India campaign of the Government, an analysis
has been made to understand how Make in India together with liberalized FDI policies can
make Indian economy more invincible. This is based on theoretical frame work of
consolidated FDI policy issued by ministry of Commerce & Industry in April, 2014, Make in
India campaign, comprehensive analysis, reasons for India being suitable for manufacturing
hub, SWOT analysis of Indian Economy, correlation between FDI and (Index of Industrial
Production) IIP

CHAPTER I: - FDI as a percentage Of GDP and Manufacturing PMI- India and China

Foreign Direct Investment (FDI) as a percentage of Gross Domestic Product (GDP) indicates
FDIs contribution towards increase in GDP of a country. Manufacturing PMI (Purchasing
Managers Index) is an indicator of economic health of the manufacturing sector of a country.

On the assumption that growth in current period Manufacturing PMI depends on increase in
previous years FDI inflow, results shows that FDI inflow of a country significantly
contributes towards improvement in Manufacturing PMI.

FDI inflow to China is much higher than India in terms of yearly FDI as a percentage of GDP
in the last five years. A study found that 1% increase in FDI would result in 0.07% increase

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GDP of China and 0.02% increase in GDP of India. Chinas manufacturing PMI is also
higher than India.

China has followed more proactive FDI policy than India, whereas India has followed
comprehensive domestic reforms. According to the U.S Bureau of Labour Statistics, labour
costs in India are among the lowest in the world. Average labour compensation (including
pay, benefits, social insurance and taxes) Indias organized manufacturing sector increased
marginally to $1.50 per hour currently. Whereas Chinas manufacturing sector it increased by
20% year-on- year and increased to $3.00 per hour currently. As per latest UN report India
has worlds largest youth population despite having smaller population than China. India has
356 million (28%) people in the age group 10-24 years old whereas China has 269 million
young people.

Besides, cost competitiveness, India boasts a nearly 500 million strong labour force
comprising of unskilled workers and English speaking scientists, researchers, and engineers,
doctors making it a potential destination for cost-effective research and development oriented
manufacturing. The rise in labour costs and the decline in working-age population have raised
questions about Chinas labour productivity. This can be seen as one of the opportunities for
India to become manufacturing hub of the world. It is evident form recent instances of some
Chinese manufacturers setting up shops in India and a few Indian companies involved in
production of electrical equipment, consumer appliances, mobile phones and auto
components moving production facilities back to India are encouraging.

CHAPTER II:- Strengths and Weakness of Indian Economy

Indian economy has got certain strengths over the other countries and at the same time some
weaknesses pushing India to back seat in attracting FDI and setting up their shops in the
country by foreign enterprises.

STRENGTHS

Cost competitive markets and low cost of production.

Availability of skilled youth with English speaking capabilities
Access to global markets from all Parts of the country.
Share in the global manufacturing with rich national resources.
Fast developing country with second highest population in the world.

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WEAKNESSES

Unorganized manufacturing sector of hazardous goods, causing damage to economy,

leading evasion of taxes and loss of government revenue.
High unemployment rate
Lack of clear industrial policy reforms
Red-tapism and bureaucracy
Underutilization of natural resources.
Poor infrastructure Facilities

OPPORTUNITIES

Low labour cost

Inflow of Foreign Direct Investment in many sectors
Creating manufacturing Hubs in collaboration with world class
Educational institutions like IITs, IIMs etc.
Huge population of India in foreign countries.

THREATS

Lack of uniform tax system for state and central governments

Foreign Exchange fluctuations and volatility in crude oil prices
Low investments in R&D due to lack of capital
Growing Competition from China, Indonesia and other foreign brands
Lack of flexibility in operating the Foreign Direct Investment (FDI) and Make in
India momentum together expected to transform the weakness of Indian economy
into strengths and threats into opportunities.

CHAPTER III: - Make In India and FDI Makes India an Economic Powerhouse

Transformation of Weaknesses into Strengths

With the entry of Multi-National Companies (MNCs) into the country through FDI route
strengthens the un-organized manufacturing sector as an organized one. This leads to
compliance of environmental laws, labour laws and tax laws. More FDI creates more
employment and reduces unemployment. With the new National Manufacturing Policy
(NMP) 2011 an estimated 100 million jobs will be created within a decade. Initiatives like
eBiz portal offers online access to core services in obtaining licenses, clearances, facilitate
ease of doing business in the country. These G2B (Government to Business) services provides

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transparency in obtaining approvals avoids red-tapism and bureaucracy. FDI in infrastructure
and construction sector facilitates in building good infrastructure thereby leading to saving
time and resources. This in-turn increases demand in creating additional capacities in steel,
cement and power sectors.

Transformation of Threats into Opportunities

As a move towards uniform tax structure, Government is proposing implementation Goods

and Services Tax (GST) from the year 2016. Amendments to Companies Act, 2013, Land
Acquisition, Rehabilitation and Resettlement Act, Safe Harbour Rules, Transfer Pricing
Circulars etc bring clarity in tax regime and establish investors confidence towards inflow of
FDI. Increased foreign exchange inflow through FDI route increases foreign exchange
reserves there by stabilizes fluctuation in currency market. FDI inflows into Biotechnology,
Pharmaceuticals Defence manufacturing increases R&D investment into the country and
fulfil the requirement of capital.

The Government has identified 20 plus sectors vis-a-vis, Automobile, Automobile

Components, Aviation, Biotechnology, Chemicals, Construction, Defence manufacturing,
Electrical Machinery, Electronic systems, Food Processing, IT and BPM, Leather, Media and
entertainment, Mining, Oil and gas, Pharmaceuticals, Ports, Railways, Renewable energy,
Roads and highways, Space, Textile and garments, Tourism and hospitality and Wellness etc
are under the Make in India initiative. As per Global Manufacturing Competitiveness Index
released by Deloitte Touche Tohmastu India is to become the 2nd most competitive
manufacturing country by 2018.

As per McKinsey & Co report Indias manufacturing sector touches One Lakh Crore dollars
by year 2025 and 30% share of GDP may come from manufacturing sector. Even today we
are importing Chemicals, Electronics, Defence Equipment, Engineering Plastic spare parts,
Consumer Durables and Medical Equipment. As a matter fact, 90% of the electronic goods
are being imported into the country. If these are captured through Make in India initiative, is a
huge opportunity to India to become economic power-house of the world.

Make in India or Make for India?

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Once Make in India becomes reality, it translates into Made in India and envisages
catering domestic market as well as export (foreign) market. On the one hand, Made in India
becomes a global brand for exports from the country and on the other hand fulfils demand by
satisfying domestic customers in which case it is Made for India (domestic consumption).
India being the second most populous country in the world consumer spending grew from
US$ 549 million to 1.06 trillion between 2006 and 2011. This, places India as one of the
worlds largest consumer market by 2015. Indias consumption is expected grow annually
over next 20 years. The growing upper middle class population in the country places India as
a consumption hub in the world. The rise in Indias middle class is very significant in
augmenting establishment of production capacities in terms of consumption (i.e. Made for
India).

However, Free Trade Agreements (FTAs) entered into with many South East Asian countries
is causing severe dent to countrys manufacturing sector. For example, FTA entered with
Thailand is a causing a concern of duty free imports of Televisions, Car spare parts, ACs and
many Engineering products into India.

Not only FDI policies and Make in India initiative, a review of other policies (Industrial
Policy, FTAs, and Tax Policies) also required for creating an environment of ease of doing
businesses. When all these measures are implemented with a long-term perspective, India can
be back on track of 8% growth rate. The growth must be inclusive, leading to eradication of
poverty, reduction in unemployment rate with emergence of many manufacturing hubs across
the country. Creating Global Environment for work force, optimum utilization of natural
resources, building a world class infrastructure brings competitive advantage and creates a
synergy effect of FDI and Make in India, thereby leads to holistic growth of the economy.

CHAPTER IV: - Suggestions for Increased Flow of FDI into the Country

1. Flexible labour law needed

China gets maximum FDI in the manufacturing sector, which has helped the country become
the manufacturing hub of the world. In India the manufacturing sector can grow if
infrastructure facilities are improved and labour reform stake place. The country should take
initiatives to adopt more flexible labour laws.

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 2. Relook at sectoral caps

Though the Government has hiked the sectoral cap for FDI over the years, it is time to revisit
issues pertaining to limits in such sectors as coalmining, insurance, real estate, and retail
trade, apart from the small-scale sector. Government should allow more investment into the
country under automatic route. Reforms like bringing more sectors under the automatic route,
increasing the FDI cap and simplifying the procedural delays has to be initiated. There is need
to improve SEZs in terms of their size, road and port connectivity, assured power supply and
decentralized decision-making.

3. Geographical disparities of FDI should be removed

The issues of geographical disparities of FDI in India need to address on priority. Many states
are making serious efforts to simplify regulations for setting up and operating the industrial
units.

4. Promote Greenfield Projects

Indias volume of FDI has increased largely dueto Merger and Acquisitions (M&As) rather
than large Greenfields projects. M&As not necessarily imply infusion of new capital into a
country if it is through reinvested earnings and intra company loans. Business friendly
environment must be created on priority to attract large Greenfields projects.

5. Develop debt market

India has a well-developed equity market but does not have a well-developed debt market.
Steps should be taken to improve the depth and liquidity of debt market as many companies
may prefer leveraged investment rather than investing their own cash.

6. Education sector should be opened to FDI

India has a huge pool of working population. However, due to poor quality primary education
and higher education, there is still an acute shortage of talent. FDI in Education Sector is
lesser than one percent. By giving the status of primary and higher education in the country,
FDI in this sector must be encouraged.

7. Strengthen research and development in the country

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India should consciously work towards attracting greater FDI into R&D as a means of
strengthening the countrys technological prowess and competitiveness.

Conclusion

FDI plays an important role in the long-term development of a country not only as a source of
capital but also for enhancing competitiveness of the domestic economy through transfer of
technology, strengthening infrastructure, raising productivity and generating new employment
opportunities. It has been analysed that there is high correlation between Industrial Production
and FDI inflows. The effect of FDI on economic development ranges from productivity
increased to enable greater technology transfer.

References

1. Dunning John H. Institutional Reform, FDI and European Transition Economies,

International Business and Governments in the 21 Cambridge University Press, 2004, 1-34.
2. Pami Dua, Aneesa I, Rashid, Foreign Direct Investment and Economic Activity in India,
Indian Economic Review, Department of Economics, Delhi School of Economics 1998;
33(2):153-168.
3. Alam MS. FDI and Economic Growth of India and Bangladesh: A comparative study,
Indian Journal of Economics 2000; lxxx (1):316, 115.
4. Sharma K. Export Growth in India: Has FDI Played a Role? Center Discussion Paper, No.
816, Economic Growth Center, Yale University, 2000.
5. Pailwar V. Foreign Direct Investment Flows to India & Export Competitiveness.
Productivity 2001; 42(1):115- 122.
6. Chakraborty C, Basu P. Foreign Direct Investment and growth in India: A Co-integration
Approach. Applied Economics 2002; 34(9):1061-1073.
7. Sahoo D, Mathiyazhagan MK. Economic Growth in India: Does Foreign Direct Investment
Inflow matter?, The Singapore Economic Review 2003; 48:151-171.
8. Iyare Sunday O, Bhaumik Pradip K, Banik Arindam. Explaining FDI Inflows to India,
China and the Caribbean: An Extended Neighborhood Approach, Economic and Political
Weekly, 2004, 3398-3407.
9. Kearneys AT. Global Services Locations Index, 2007. www.atkearney.com

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10. Dunning John H. Institutional Reform, FDI and European Transition Economies,
International Business and Governments in the 21Cambridge University Press, 2004, 1-34.
11. Iyare Sunday O, Bhaumik Pradip K, Banik Arindam Explaining FDI Inflows to India,
China and the Caribbean: An Extended Neighbourhood Approach, Economic and Political
Weekly, 2004, 3398-3407. 12. Klaus E Meyer. Foreign Direct investment in Emerging
Economies, 2005. www.emergingmarketsforum.org.
13. Khor Chia Boon. Foreign Direct Investment and Economic Growth, 2001.
www.oocities.com/hjmohd99/theses.html.
14. Ms. Sapnahooda. A study of FDI and Indian Economy; Doctor of philosophy from
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