Dawn on the outcome of Make in India? (India) | Regional / Analysis Report-Overseas Business Information-JETRO

Under the "Make in India" policy, India will take measures such as high tariffs to protect domestic industries. On the one hand, incentives will be given to foreign companies that manufacture domestically. Regarding the former, withdrawal from the Regional Comprehensive Economic Partnership (RCEP) agreement negotiations is also fresh in our memory. In February 2021, it announced a tariff increase in the 2021 budget (April 2021 to March 2022). Regarding the latter, incentives such as a production-linked incentive (PLI) scheme that subsidizes according to sales are provided to companies that manufacture specific products in Japan, and Taiwanese manufacturers that are contracted to manufacture iPhones utilize them in India. Expand production.

Why is India taking such a move? And is it going as expected? I would like to think about the trade deficit, which is said to be a structural problem, while unraveling it.

"Ame and Whip" in "Make in India"

"Make in India" is the slogan for promoting the manufacturing industry, which has been set up since 2014 when Prime Minister Modi took office. The goal is to promote the attraction of direct investment through the improvement of the investment environment and raise the ratio of the manufacturing industry to GDP from 15% to 25%. As a result, we aim to create new jobs, reduce the trade deficit, and expand exports.

Under this policy, the Government of India will promote the protection of domestic manufacturing industry and the domestic production of high value-added parts. Externally, it will raise basic tariffs on specific products and restrict imports. In the 2021 budget plan, basic tariffs on parts such as chargers and printed circuit boards for mobile phones in the electric and electronic parts field, and compressors for refrigerators and air conditioners in the home appliances field were raised (Business Brief on February 12, 2021). reference). In October 2020, an import ban on air conditioners containing refrigerant was introduced.

On the other hand, for foreign-affiliated companies expanding into India, many fields will be opened and investment will be actively attracted. In particular, he is enthusiastic about attracting the manufacturing industry. Incentives will be taken, such as a reduction in corporate tax (see Business Brief on October 1, 2020) and a production-linked incentive (PLI) scheme to encourage domestic production (see Business Brief on May 21, 2020).

Even in the case of the new Korona-ka, the Indian government launched "Self-Reliant India" in May 2020, strengthened "Make in India", and established and imported a global supply chain. It has stated that it will reduce its dependence (see Business Report dated May 14, 2020).

Current account deficit and trade deficit due to IT powerhouse

Why does the Government of India take policies to protect these domestic industries? I would like to see the economic structure behind it. From the breakdown of the current account balance in Fig. 1, we can see a constant current account deficit mainly due to the trade deficit. It is the service balance and the secondary income balance that earn the surplus. Most of the service balance is occupied by computer services such as software outsourced development. Most of the secondary income balance is in the black by remittances from overseas, including migrant workers to Middle Eastern countries.

On the other hand, the trade balance is in the big deficit. In 2012, it recorded a trade deficit approaching $ 200 billion. At one point, the deficit decreased due to the fall in crude oil prices, but it has remained at a high level since then, and the surplus service balance and secondary income balance have not completely offset the deficit.

India has emerged as an IT service exporter to Europe and the United States since the 1990s. Therefore, unlike the ASEAN countries, the tertiary industry (service industry) became the main industry first, not the secondary industry (manufacturing industry). Therefore, the structure is such that the service balance surplus ratio is large. With economic growth, domestic demand for high value-added products such as home appliances and durable consumer goods such as personal computers has increased, and most of the demand has been covered by imported products. The current situation is that there are no industries that can replace the imports with domestic production and that can earn a surplus by exporting.

Concerned about trade deficit with China

Looking at the status of imports by country in more detail, it can be seen that excess imports from China, especially electrical equipment (HS code: 85), have a large effect (see Fig. 2). The ratio of the trade deficit to China was 53% in FY2016. After that, it still accounts for about 30-40%. Items that have a particularly large impact are electrical equipment, including mobile phones. It accounts for around 40% of the total deficit with China.

As demand for electrical equipment is expected to continue increasing along with economic growth, eliminating the deficit with China has become an urgent issue. In fact, it seems that the reason for leaving RCEP in November 2020 is that it is afraid that imports from China, where the deficit is expanding, will increase due to the reduction of tariffs (Times dated November 15, 2020).・ Of India Paper).

The value of exports from India to China is also increasing. However, India exports relatively low value-added products and cannot make up for the trade deficit with China. Exports to China in 2020 increased 16.2% year-on-year to $ 20.9 billion, surpassing $ 20 billion for the first time. It was steel stone, steel, aluminum, copper, etc. that pushed them up. The proportion of primary products and metals is large. On the other hand, industrial products account for an extremely low proportion of exports to China. Therefore, there are conspicuous reports that India should focus on expanding exports of high value-added products (Business Line dated February 23, 2021).

What are the results of Make in India?

So far, we have looked at India's trade structure. It can be seen that the importance of the manufacturing industry promotion measures by "Make in India" lies in the realization of import substitution and the development of industries that enable the export of high-value-added products. So, has the promotion of "Make in India" been successful in addressing these issues?

Looking at the manufacturing industry as a whole, the goal of increasing the manufacturing industry ratio set forth in "Make in India" has not yet seen a significant effect. The manufacturing share of GDP is 17% as of 2020. It has not reached the government's 25% target.

However, when viewed individually, there are some areas where results have been achieved. In the field of mobile phones, in addition to the high tariff policy, we have introduced a "gradual manufacturing program (PMP)" that gradually raises the tariff rate of various parts. Domestic production of mobile phones increased from 60 million units in 2014 to 225 million units in 2017, nearly quadrupling that number (see Business Report dated March 12, 2019, June 24, 2019). See regional / analysis report). Over the past few years, industrial agglomeration and expansion of production bases have progressed, including Taiwanese manufacturers such as Foxconn and Wistron, which are contract manufacturers of iPhones, and Chinese manufacturers such as Samsung (Korea) and Xiao Mi. At the same time, there are reports that the movement to disperse production bases in response to the intensifying trade friction between the United States and China has had an advantage ("Live Mint" newspaper dated June 12, 2019). The import value of mobile phones (HS code: 851712), which was $ 7.43 billion in 2014, will decrease to $ 860 million in 2019. In addition, China's share of total imports has fallen to 60% in 2020. This percentage in 2017 accounted for 97% (see Figure 3).

Achievements in export

The sales of these mobile phone makers are basically for domestic demand. Nonetheless, exports have also been successful. Mobile phone exports were only $ 140 million in 2017. However, by 2020, it has expanded to $ 3.01 billion in the Korona-ka (see Figure 3). This is partly due to the increased use of government incentives such as the PLI scheme (see Business Brief on March 18, 2021).

In this way, in the mobile phone field, which was a major import item from China, the shift to domestic production and export industry has progressed. It can be said that this is an example of attracting foreign capital, substituting imports, and expanding exports at the same time. This is exactly what "Make in India" is aiming for.

In addition, Amazon announced in February 2021 plans to set up a production base for Fire Stick TV in Chennai, Tamil Nadu, in the south. It promises to export a cumulative total of $ 10 billion by 2025. This also seems to be a move to reduce dependence on China, the supply base (Times of India, February 17, 2021). It can be said that the movement to set up a production base in India is steadily progressing.

How about in other fields? As a result of our efforts so far, the export ratio of general machinery, electrical equipment, and transportation equipment has gradually increased. By 2020, each will achieve a 5-6% share of India's total export items.

Steadily execute growth strategy

India has been regarded as a country with many business challenges for companies entering the market due to the lack of infrastructure, tax system / tax affairs, and complicated administrative procedures. Under such circumstances, the concept of "Make in India" was to promote the manufacturing industry in the order of "improvement of business environment-> attraction of foreign capital (technology transfer)-> promotion of domestic manufacturing industry-> import substitution-> expansion of exports". It was a flow to eliminate the trade deficit.

Considering this trend, import substitution and export expansion are only partially progressing. However, certain results can be seen in improving the business environment, which is a major premise. Prime Minister Modi has made many reforms, including the introduction of the Goods and Services Tax (GST), relaxation of foreign capital restrictions, online licensing and procedures, and legislation such as the Bankruptcy Law. Looking at the World Bank's business environment rankings, the results are reflected in a significant rise from 142nd place (2015) to 63rd place (2020).

Naturally, it will be difficult to immediately realize industrial development and changes in the economic structure. It will take many years to realize the expansion of exports beyond the promotion of the manufacturing industry. However, it may be said that India is steadily implementing its own growth strategy, and some of the results are beginning to appear.