Make in India?

What are the realities of investing and making in India? What has changed and what hasn’t? Rebecca Abraham reports

On 2 July 2014, six weeks after Narendra Modi was sworn in as prime minister of India, the validity of an industrial licence – necessary for everything in India from processing hides and skins to manufacturing grease-proof papers and automobiles – was extended from two years to three years. Ten months later the validity of an industrial licence for the defence sector was extended from three years to seven years “in view of the long gestation period of defence contracts to mature”.

Changes such as these are the building blocks of Modi’s initiative to “Make in India” – which he unveiled from the ramparts of the Red Fort in Delhi on 15 August 2014. Since then the idea of making in India has caught the imagination of many both inside and outside India.

Brand building

“Make in India as a campaign and a brand is successful if you view it from how many people are aware of it,” says Pankaj Singla, a foreign law researcher at Soga Law Office in Tokyo. Singla, who is one of a handful of Indian lawyers working in Japan, adds that “this is the first time that I have met so many people outside India who actually know the name of the Indian prime minister”.

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“Since Modi came into power the perception about India among our clients in the UK and Europe and elsewhere has definitely improved,” remarks Laurence Lieberman, a partner at Taylor Wessing who heads the firm’s UK-based India practice.

While improving the image of India appears to be part of what India’s prime minister has sought to achieve over the past two years, the Make in India initiative is specifically designed “to facilitate investment, foster innovation, protect intellectual property, and build best-in-class manufacturing infrastructure”. The campaign focuses on 25 industries in India, including the renewable energy sector, and results have been impressive.

A week-long series of Make in India events in Mumbai in early February this year, where 17 states showcased themselves as business-friendly destinations for investors, has produced promises of investment totalling ₹15.2 trillion (US$225 billion). The host state Maharashtra signed almost 3,000 memorandums of understanding (MOUs) promising investments to the tune of ₹8 trillion.

Keeping promises

But the billion dollar question is how many of these MOUs will translate into actual investment. For despite measures to improve the ease of doing business, such as extending the validity of industrial licences and integrating the services of all central government departments and ministries with eBiz, a single-window government-to-business portal, investors remain wary and do not always deliver on promises.

A case in point is the contract manufacturer Foxconn, which has been in India since 2006. The company signed an MOU in August 2015 with the Maharashtra government as a first step in investing US$5 billion to set up research and development and manufacturing facilities within the next five years, which was seen as a boost for the government’s Make in India initiative. But Foxconn, which has been known to drag its feet on commitments to invest, is yet to begin even the process of acquiring land for the project.

While MOUs may fail to bear fruit and the complexities of doing business in India continue to be considerable, Lieberman at Taylor Wessing says investors have been taking India more seriously in the past couple of years. “Two or three years ago they might have just done nothing with the India leg [of a larger multinational transaction]. They might have thought India is a difficult market and we are not going to invest in it, but definitely now they are taking the India part of the business and sorting it out and seeing it as a vehicle for growth in India.”

Sherina Petit, partner and head of the India practice at Norton Rose Fulbright, echoes these sentiments. She sees a visible uptick in interest in India and says clients are keen to explore and make investment in India as part of their global investment strategy.

“The policy is clearly working and investment is flowing in,” remarks Petit, who adds that “the renewable energy sector is one of the standout successes”.

“There is a sense that doing business in India is becoming more and more efficient … what clients are finding difficult is the bureaucracy involved in the different sorts of industries,” says Akash Devani, a partner at Anjarwalla & Khanna in Mombasa, Kenya. “If you are a new player in the market information may not be immediately available.”

Devani recently assisted a client (with operations in Kenya, Uganda, Tanzania and Mauritius) in executing a US$500,000 investment in an Indian manufacturer of biscuits and confectionery based in Gujarat. “Our client found the process a lot more comforting knowing that things were improving and getting better”.

Ground-level contradictions

However, conditions on the ground continue to be a challenge.

Pointing to the federal structure of India, Alasdair Steele, partner and head of the India group at Nabarro, says that despite changes carried out by the central government, there are still “a raft of state-level rules and regulations” that have to be dealt with. “This is, of course, core to any federal democracy but does allow for state-level contradictions and obstructions to the reforms,” remarks Steele. “Simply opening up FDI will not solve all the issues.”

“At the ground level, government has not been able to show an iron fist and industry is held at ransom [by low-level officials],” says Bharat Anand, a New Delhi-based partner at Khaitan & Co, who adds that despite changes made by the central government, Indian industry is suffering greatly.

Anand says that “several M&A transactions have been held up on account of high transaction costs”, to transfer leases, etc., and that such costs have made the restructuring of businesses – sorely needed in several cases – very expensive to implement.

Anomalies persist

Such legal and regulatory anomalies are cause for concern. India’s labour laws – a patchwork of central and state-level laws and regulations – have long been seen out of step with the needs of industry, but there is no sign that they will be reformed any time soon.

Ryo Kotoura, a partner at Anderson Mori & Tomotsune in Tokyo, advises Japanese automobile companies and auto components companies looking to set up businesses, establish joint ventures and acquire existing businesses in India. Japanese ventures are some of the success stories of making in India, but, as Kotoura says, “the disaster [stories] are labour issues”.

“Indian labour laws do not have a good balance between employers and employees, rather they tend to strongly protect employees,” says Kotoura. “Labour unions often make strikes and most of the Japanese automobile companies have suffered the adverse effect of strikes.”

Land acquisition is another area where problems persist, but here some solutions have emerged as various state governments have been competing against each other to woo international investors.

Singla at Soga Law Office points out that competition among states has been beneficial in particular for Japanese investment as states have set up so-called Japanese industrial clusters. As a result, land acquisition is one of the lesser concerns for Japanese investors, says Singla.

Rajasthan set up the Neemrana Japanese Zone which currently has approximately 27 Japanese companies and is developing a second industrial zone for Japanese investors, where the focus will be on ceramics and electronic systems design and manufacturing. Tamil Nadu, which accounts for almost 40% of all Japanese investment into India, has similar clusters.

An idea that has taken root

“The one thing about India is that when something is done well, it is world class,” remarks Steele at Nabarro.

Sentiment such as this, combined with innovative steps taken to overcome India’s legislative and regional challenges, has fortified interest in the country.

“Companies are now recognizing that the government is very committed to the Make in India initiative and that they really want companies to set up manufacturing in India,” says Babita Ambekar, special counsel at Duane Morris & Selvam in Singapore. Ambekar says this is a big change considering that in the beginning people asked, “Why make in India? Why can’t we just sell to India?” and, as a result, some “companies are re-evaluating their India strategy”.

According to a report in the Economic Times, Phil Shaw, chief executive of Lockheed Martin India, recently said that the company is “ready to manufacture F-16s in India and support the Make in India initiative”. This would be a major coup for India and the Modi government.

While Shaw has not committed to a time line, the fact that companies such as Lockheed Martin are talking of manufacturing in India is confirmation that the idea of Make in India has taken root.