Modi Work Reforms Aim to Make India a Global Manufacturing Hub

Indian Prime Minister Narendra Modi is keen to make India a global manufacturing hub and plans a series of business-friendly measures if he wins a third term – as widely expected – this week.

Those moves include regulations making it easier to hire and fire workers, state officials have said.

As part of an election pledge, Modi wants to offer subsidies for domestic production modelled on recent packages for semiconductor firms and electric vehicle makers, according to officials, who spoke on condition of anonymity because they were not authorised to talk to media.

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The premier also plans to reduce import taxes on key inputs for locally-made goods, which have pushed up India’s manufacturing costs, the officials said.

Modi’s office and the labour and finance ministries did not respond to questions.

Exit polls project that the right-wing coalition led by Modi’s Hindu nationalist Bharatiya Janata Party (BJP) will win a big majority when election results are announced on June 4.

Modi’s reelection campaign was partly built on the promise of continued economic development. He’s pitching India as an alternative for global firms diversifying their supply chains from China.

Targeting more global factories

India is the world’s fastest-growing major economy. And that includes both a booming tech sector and a struggling older economy that doesn’t provide enough jobs for everyone else, Josh Felman, the former head of the International Monetary Fund’s office in India, said.

“What can be done now to provide employment – good jobs for these people – is manufacturing,” Felman said.

India successfully lured suppliers for major US corporations like Apple and Alphabet’s Google. But less than 3% of global manufacturing takes place in the world’s most populous country, compared to 24% for China, World Bank data shows.

The government plans to increase India’s share of global manufacturing to 5% by 2030 and 10% by 2047, according to an internal document that did not provide specifics.

Bureaucrats, representatives of major investors, economists and trade unionists identified three significant obstacles holding India back from manufacturing hub status: restrictive labour laws, challenges acquiring land, and a rigidly inefficient tariff regime.

‘Shanghai model’ in Gujarat

When Modi was chief minister of his home state of Gujarat between 2001 and 2014, he dreamt up an investment zone in the Dholera region. Legislation creating the Dholera Special Investment Region (DSIR) was passed in 2009 and local authorities began acquiring land for it in 2013.

The plan, Modi said during a 2011 visit to a Chinese port, was to develop DSIR along the “Shanghai model”.

Starting in the 1980s, China set up special economic zones along its southeastern coast that are widely credited for it becoming the world’s factory floor.

Land reform was a precursor for China’s manufacturing rise. Starting in the 1970s, Beijing separated ownership from usage rights, making it easier for investors to acquire industrial land, said Henry Gao, a Chinese trade expert at Singapore Management University (SMU).

Beijing’s industrial zoning policies also made it easier for industries to set up in areas with ready access to materials and facilities, he said.

As prime minister, Modi has continued to stress the importance of industrial zones for India. In March, he described facilities under construction in DSIR as central to the creation of an Indian semi-conductor manufacturing hub.

Tata Group announced plans in January to build India’s first semiconductor fabrication plant there. During a visit in March, Reuters also saw construction activity for an upcoming cargo airport and promotional billboards set up by real-estate developers. There were paved roads and a waterfront but little sign of bustling business.

DSIR hopes to attract more manufacturing companies by providing leases of up to 99 years on government-owned land, Rahul Gupta, head of the Gujarat Industrial Development Corporation, said.

Land reforms, new labour laws needed

Local officials have said that it took more than a decade to acquire land and award infrastructure contracts, but Gupta predicted there would be much more activity in about two to three years.

Outside such zones, industrial groups still have to undergo a “very difficult process” to acquire the large plots of land they need because title deeds are often unclear and holdings are fractured, Richard Rossow of the Washington-based Center for Strategic and International Studies think-tank, said.

In May, Foxconn – whose local investment was trumpeted as a major success by Modi – was met with protests by farmers in Karnataka state unhappy with the compensation they received from local authorities for giving up their land to the manufacturer, Indian media reported.

The Taiwanese company didn’t return a request for comment.

In much of India, firms with more than 100 employees need authorisation from state governments to hire and fire. This prevents companies from adjusting their operations to meet demand, Atul Gupta, partner at Bengalore law firm Trilegal, said.

The BJP-controlled parliament has passed legislation to raise the threshold before official approval to 300, but state authorities that must consent to the changes have stalled the move.

Modi hopes that a strong win on June 4 will give him the momentum and political capital to push through their opposition, the two government officials said.

“No government wants to come across as giving permission to a company to let go of their employees (but)…this is just used to drag out the closure or the terminations endlessly,” Gupta, who advocates labour reforms, said.

General Motors, for instance, decided to shut plants in Gujarat and neighboring Maharastra in 2017, citing low sales. But unions opposed the closures and GM only received judicial approval to exit India completely in January. The US carmaker declined to comment.

To avoid such difficulties, companies end up using contract workers for extended periods, labour lawyer Amrish Patel, said.

HSBC economists said that sweeping changes to labour regulations as well as land reforms are needed to sustain high growth.

In a note to investors last month, HSBC economist Pranjul Bhandari wrote that such reforms could allow India to grow at 7.5-8% over the next decade, creating a wealth of jobs.

But lawyer and union leader Sanjay Singhvi said nearly 60% of the workers who benefit from current labour laws would lose protections if the BJP’s codes are implemented.

Praveen Chakravarty, a senior economics policy official with the main opposition Congress, said labour law decisions should be left to the states. His party’s manifesto calls for a review of the labour codes passed by parliament.

Tariffs also a concern

Manufacturing costs in India are also elevated because of tariffs on imports, including components for high-end manufacturing.

To encourage smartphone production, Delhi cut import duties on components to 10%. But competitor Vietnam already levies a rate of between 0% and 5% on equivalent inputs, according to the India Cellular and Electronics Association.

The average import tariff imposed by India on World Trade Organisation (WTO) members was 18%, compared to 7.5% for China, according to WTO data for 2022, the most recent year for which figures are available.

Customs processes are also significantly quicker and less burdensome in China, said Gao.

Imports can clear customs in China in about 20 hours, said the SMU professor. It takes between 44 and 85 hours in India, according to a 2023 government study.

Beijing has focused its efforts on being a key node in the supply chain rather than attempting to own the entire chain, leading to greater efficiencies.

For instance, products exported by China often include inputs from other Northeast Asian countries, said Christian de Guzman of Moody’s Ratings. But Delhi “wants to have the entire thing come onshore,” Guzman said.