The key drivers behind increased foreign investment and export growth in India’s manufacturing industry
India’s manufacturing sector is experiencing significant growth due to favorable government policies, cost advantage, and strategic geographic location. The sector’s expansion is supported by digital transformation, improved infrastructure, and a rising domestic market, making India a global manufacturing hub.
- Sunanda Kumar Palit
- ETManufacturing
- Updated On Jan 31, 2025 at 08:56 PM IST
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India’s manufacturing sector has seen rapid growth, playing a crucial role in the country’s broader economic development. This expansion has not only boosted exports but has also attracted significant foreign investment. A combination of robust government initiatives, highly skilled labour, competitive pricing, and a growing domestic market has helped India stand out as a global manufacturing hub.
Several key factors are driving the growth and success of India’s manufacturing industry such as:
Favourable government policies
There has been a great push from the government. From policies, incentives to the ease of doing business, the government is pursuing a multi-pronged approach to establish India as a global manufacturing hub.
“Introduced in 2014, the ‘Make in India’ campaign was designed to strengthen local manufacturing and establish India as a key player in global production.” The program provided incentives for investments in 25 key sectors.
To encourage growth, the Indian government launched the Production-Linked Incentive (PLI) Schemes, offering financial incentives to both local and foreign manufacturers who increase output in sectors like electronics, pharmaceuticals, and renewable energy.”
Apart from the above, India has also put in efforts to make it easy to do business with the introduction of digitalization, easy compliance and approval processes. “As a result, India’s position in the World Bank’s Ease of Doing Business Index (A global benchmark) has improved, marking a significant step forward on the global stage.”
Strategic geographic advantage
India is strategically located in a way that it has the logistical advantage of exporting goods to markets such as the Middle East, Europe, Africa, and of course, Asia. Due to its close location to emerging economies, it’s easier and affordable for India to build trade networks and connect with global markets.
Cost-advantage
India leads the race in offering the most competitive labour cost coupled with a large skilled workforce. This makes India the favorite destination for global investors.
Expanding infrastructure
There had been a concentrated effort in improving the country’s physical and digital infrastructure, playing a key role in attracting foreign investments.
Digital India Mission: This tops the list as digital transformation helps with smoother processes, automation leading to faster production with fewer mistakes, and overall technology adoption in manufacturing boosting performance.
Industrial Corridors and Smart Cities: Establishment of integrated industrial hubs with the best infrastructure and connectivity has added to ease of doing business. E.g., Delhi-Mumbai Industrial Corridor (DMIC)
Port Modernization and Connectivity: India has also ramped up the upgradation of ports to facilitate seamless exports.
Growing domestic market and rising middle class
The growing middle class with more disposable income has forced foreign investors to view India not just as a production base but also as a consumer market. This has led to an increased demand for manufactured goods, helping with production and consumption.
Sectoral strengths driving exports
India’s manufacturing industry is characterized by strong performance in specific sectors that significantly contribute to exports:
- Automobile manufacturing: India is the world’s largest manufacturer of two-wheelers and a key player in the automotive supply chain Exports of automobiles and auto components have witnessed consistent growth.
- Textiles and apparel: India is one of the largest exporter of textiles and garments, leveraging its rich heritage and competitive production costs.
- Electronics and IT hardware: With the PLI schemes, India has become a significant exporter of mobile phones and electronic components.
- Pharmaceuticals: India is a globally a leader in generic drug manufacturing, contributing heavily to pharmaceutical exports.
India has also placed a lot of focus on strengthening trade relationships through bilateral and multilateral agreements. Certain recent agreements, like the Comprehensive Economic Partnership Agreement (CEPA) with the UAE, facilitate greater market access and lower trade barriers.
Technology adoption and innovation:
Indian manufacturers are increasingly adapting advanced technologies like automation, artificial intelligence, and IoT to enhance productivity and competitiveness. Government-backed initiatives like the National Policy on Electronics and industry collaborations further foster innovation
Sustainability focus:
India has also placed a lot of emphasis on green manufacturing practices and is focusing on renewable energy usage in production. This has helped India align its manufacturing capabilities with global sustainability goals.
India’s manufacturing industry is on a boom due to government policies, geographical competitive advantage, cost advantage, and an ecosystem that supports both domestic and global demand.
(Sunanda Kumar Palit is the Head – Strategy, Product Management and Customer Care at Ador Welding Ltd. Views expressed are personal.)
India’s Foreign Direct Investment – What are the top factors to look at?
INDIA’S FOREIGN DIRECT INVESTMENT – AN ANALYSIS
Foreign Direct Investment (FDI) has been growing at a healthy pace in India in the last decade. In 2022, India ranked 7 th in terms of attracting FDI which is one rank above compared to 2021. In spite of the global economic slowdown due to the pandemic and the Russian invasion of Ukraine, India continued to attract FDI from across the globe.
Foreign Direct Investment inflows to India, which stood at $45.15 billion during the financial year (FY) 2014-15 almost doubled during the FY 2021-22 to $84.84 billion which was the highest annual FDI ever received. Total FDI inflows received in the last 8 years (April 2014- March 2022) was $523 billion which amounts to nearly 40% of total FDI inflow since 2000.
The Indian Government’s favourable policies towards foreign investment have helped tremendously to attract FDI into the country. India came out with several favourable schemes and policies to attract foreign investors. Many schemes like Make in India, Production Linked Incentive (PLI) scheme and the Gati Shakti policies for logistics and industrial development have been successful in attracting FDI. India opened up new sectors like defence and aerospace, R&D and real estate thereby increasing the interest in investing in India.
Sources of Foreign Direct Investment
Singapore (27.01%) and the USA (17.94%) have emerged as the top 2 sourcing nations in FDI equity flows into India in FY2021-22 followed by Mauritius (15.98%), the Netherlands (7.86%) and Switzerland (7.31%). The other major investing countries in India during the same period were the U.K., Japan, UAE, Cayman Islands and Germany.
Sector-wise Foreign Direct Investment
The top 5 sectors receiving the highest FDI Equity Inflow during FY 2021-22 are Computer Software & Hardware (24.60%), Services Sector (Finance, Banking, Insurance, Non-Financial/Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (12.13%), Automobile Industry (11.89%), Trading 7.72% and Construction (Infrastructure) Activities (5.52%).
The top 5 States receiving the highest FDI Equity Inflow during FY 2021-22 are Karnataka (37.55%), Maharashtra (26.26%), Delhi (13.93%), Tamil Nadu (5.10%) and Haryana (4.76%)
The top 5 sectors receiving the highest FDI Equity Inflow during FY 2021-22 are Computer Software & Hardware (24.60%), Services Sector (Fin., Banking, Insurance, Non- Financial/Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis, Other) (12.13%), Automobile Industry (11.89%), Trading 7.72% and Construction (Infrastructure) Activities (5.52%).
Routes & Policies – Foreign Direct Investment
There are two routes by which India gets FDI.
- Automatic route: By this route, FDI is allowed without prior approval by the Indian Government or Reserve Bank of India.
- Government route: Prior approval by the government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal.
- Sector-Specific Approvals: Depending on the sector the FDI is being invested in, there are sector-specific approvals and these vary from sector to sector.
- Prohibited Sectors: There are some sectors that are prohibited from foreign investment. These are, Lottery and related businesses; Gambling and betting including casinos; Certain kinds of non-banking financial companies; the Manufacture of tobacco and tobacco products; Atomic Energy; Railway operations; Certain specified real estate businesses.
Approval Process
Once an application is made, the Department of Promotion of Industry & Internal Trade (DPIIT) will identify the concerned Ministry/ Department and thereafter, circulate the proposal within 2 days. In addition, once the proposal is received, the same would also be circulated online to the Reserve Bank of India (RBI) within 2 days for comments from the Foreign Exchange Management Act (FEMA) division of the RBI for their perspective.
DPIIT would be required to provide its comments within 4 weeks from receipt of an online application, & Ministry of Home Affairs (if applicable) to provide comments within 6 weeks. If needed, additional information/ clarifications may be asked from the applicant which is to be provided within 1 week. Proposals involving FDI exceeding INR 50bn (approx. $775 million) shall be placed before the Cabinet Committee of Economic Affairs.
Investment Protection Treaties
Bilateral Investment (Protection) Treaties (BITs) are reciprocal agreements between two countries to promote and protect foreign investments in each other’s countries. BITs establish minimum guarantees between the two countries regarding the treatment of foreign investments, such as national treatment (treating foreign investors at par with domestic companies), fair and equitable treatment (in accordance with international law), and protection from expropriation (limiting each country’s ability to take over foreign investments in its territory).
Till 2015, India had signed BITs with 83 countries out of which 74 were in force. In 2015, India revised the draft BIT agreement and came out with what it called a Model BIT Agreement. Since then, India terminated its BITs with 77 countries, has signed investment treaties with only 4 countries and is still in negotiations with 37 countries.
The Future Scenario – Foreign Direct Investment
India has done reasonably well with regard to FDI as compared to most countries. It has attracted foreign investors in a number of industries due to its political stability, democratic government, huge pool of technically qualified youth, lower costs and huge domestic market. India also has geographical advantages and could be the gateway to the southeast Asian markets.
Considering the fact that India is now the sixth largest economy in the world and also the fastest growing large at an estimated GDP growth of 6% for 2023, it can do much better in inviting even higher levels of FDI. It could attract far greater investments from foreign companies if it is able to improve its infrastructure, reduce bureaucratic procedures, eliminate corruption, simplify the complex taxation system, reduce the huge customs duties, get rid of the protectionist policies and do away with the endless delays due to various factors.
SAS Partners – Your India Entry Partner
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About the Author
Mr. Vijay Kumar is an Industrial Economist with 35+ years of experience in Economic Analysis, Trade & Investment Promotion, International Business Strategy & Cross-Cultural Impact. A Post-Graduate in Economics with specialization in Industrial Economics and Economics of Transportation, Public Utilities & Social Infrastructure from the University of Bombay (1982). In 1984, he joined the Consulate General of the Netherlands in Mumbai as an Economic & Commercial Officer and continued his association with the Netherlands Government (NBSO) for over 30 years.
At SAS Partners, he heads the Trade and Investment Promotion activities, supports organising programmes for international business delegations, curates knowledge reports, and market studies and also helps our international clients in understanding the Indian business landscape better.
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