Investing In India Requires A Keen Eye And Steady Hand.

Updated: Nov 10, 2020

India hopes to persuade manufacturers to diversify their supply lines by calling the South Asian country home, but relocating from China presents challenges that investors need to be ready for.

India has been striving for the majority of the last decade to become a manufacturing hub to rival China, a mission that has gained an added sense of urgency in the last couple of years.

China’s deteriorating bilateral relationship with the US has seen a growing number of global manufacturing powerhouses diversify their supply lines to reduce their exposure to Washington and Beijing’s trade war.

Vietnam and Thailand have been the notable winners in this shift, attracting the majority of manufacturing relocations since Washington first introduced trade tariffs on Chinese goods in 2018. India, however, is eager to grab a share of this new wave of investment and has been working to promote itself as the logical manufacturing alternative to China.

Speaking at the US–India Strategic Partnership Forum (USISPF) on September 3, Indian Prime Minister Narendra Modi invited US companies to invest in India, touting the country’s “stable tax regime and attractive Foreign Direct Investment (FDI) policies”.[i]

While the South Asian economic giant’s policy initiatives—such as the Make in India programme—have increased the country’s allure as an investment destination, investors still need to exercise caution before diving in headfirst.

New opportunities

Having missed out on the low-tech manufacturing boom that saw China emerge as the world’s factory towards the end of the last century, New Delhi has focused on turning the country into a destination for high-tech manufacturers.

The government sees the fourth industrial revolution (Industry 4.0) as key to its near- and long-term economic development. Modi launched the Make in India campaign in September 2014 to boost manufacturing across twenty-five sectors and help expand the manufacturing sector’s share of GDP from around 15% to 25% by 2025.[ii] But with manufacturing still accounting for only around 17% of GDP,[iii] the government understands more must be done to attract investment in the country.

To this end, New Delhi announced in March that it would offer a financial incentive of 25% of electronics manufacturers’ capital expenditure on plant, machinery, equipment, associated utilities and technology.[iv] The incentive is part of a strategy, unveiled in 2019, to position the country as a global electronics hub by expanding India’s ability to develop and manufacture core components.

The government also introduced in March a five-year production-linked incentive (PLI) scheme for large-scale mobile phone and electronic component manufacturing, granting companies 4% to 6% on incremental sales of Indian-made goods.[v] The government announced on October 6 that it had approved applications from sixteen firms under the PLI scheme, noting that the applicants included Samsung as well as three of Apple’s contract manufacturing partners.[vi]

The Indian Ministry of Finance’s economic affairs secretary, Tarun Bajaj, told a virtual conference in July that his department was also working on new production-linked incentives for up to five sectors to boost local manufacturing and attract new investment.[vii]

This announcement was followed by reports in September that India was considering incentives worth INR1.68tn (US$22.83bn) for manufacturers within the automobile, solar panel, specialty steel, textile, food processing and pharmaceuticals sectors.[viii]

Beyond direct initiatives targeting international manufacturers, the government has also embarked on a series of wider structural reforms aimed at improving the economy’s overall attractiveness for FDI.

For example, New Delhi approved the Major Port Authorities Bill, 2020 in March, paving the way for state-owned ports to become leaner and more flexible, with greater autonomy when it comes to upgrades and capacity expansions.[ix]

To bolster domestic transport connectivity, the government earmarked INR918.23bn (US$12.48bn) for the construction of 15,500 kilometres of new highways, including the development of 9,000 kilometres of economic corridors.[x]

In the power sector, meanwhile, New Delhi is mulling long-term reforms around subsidies, retail competition and state-owned power distribution.[xi]

But luring manufacturers from China in a post-COVID-19 global economy is by no means a sure thing, especially given the United Nations Conference on Trade and Development’s warning in June that global FDI is forecast to decrease by up to 40% this year from 2019’s $1.54tn.[xii]

As such, New Delhi cannot afford to relax the pace of its economic reforms.

“Along with affordability of geography, companies are now also looking at reliability and policy stability. India is the location that has all of these qualities. As a result, India is also becoming one of the leading destinations of foreign investment.”

Indian Prime Minister Narendra Modi

New angles

Modi remains confident that despite the COVID-19 pandemic’s inherent challenges, his country remains well placed to win over US investors looking to diversify their supply lines.

“This pandemic has also shown the world that the decision to base global supply chains should not only be based on cost but also on trust,” the prime minister said. He added:

“Along with affordability of geography, companies are now also looking at reliability and policy stability. India is the location that has all of these qualities. As a result, India is also becoming one of the leading destinations of foreign investment.”i

Beyond these qualities, India also boasts a major competitive edge over China in terms of cheaper manufacturing labour. Taiwan-based contract manufacturer Genimex has estimated that the average cost of manufacturing labour per hour in 2014 was $0.92 in India and $3.52 in China.[xiii]

Yet while India is striving to introduce economic reforms and incentives to capitalise on growing investor unease in the face of the Sino-US trade war, certain risks must be addressed before any final investment decision (FID) is reached.

Manufacturing evolution

The Chinese manufacturing sector has evolved over decades in terms of not only sophistication and quality control but also investor understanding of cultural and market nuances.

Assuming that what worked in China can be replicated in India, which is home to many different micro-markets that have their own unique dynamics at play, could prove to be a costly mistake.

Developing supply lines in India requires a keen understanding of the potential trade-off between national policies, with a prime example being the contradiction between Modi’s bid for establishing a self-sufficient national economy, through[SS1] the Atmanirbhar Bharat policy and India’s long-stated goal of becoming an international manufacturing hub.

The goal of Atmanirbhar Bharat is to create a self-reliant and self-sufficient Indian manufacturing space, not one that is a global export hub. Indeed, government officials reportedly [xiv][mc2] [AK3] want to use funds earmarked for the Merchandise Exports from India Scheme (MEIS), currently India’s largest scheme for export incentives, to fund new production-linked incentives. MEIS has been criticised for failing to boost exports, with some even condemning it as a “miserable failure”.xvi

Understanding India’s shifting national priorities is just one of many areas that companies need to address quickly, with any exit strategy from China needing comparative analysis of the state of infrastructure, taxation, labour and logistics—not to mention industry policy, economic laws and regulations—in target countries. Investors will need to spend time and money on setting up additional systems to comply with local laws—environmental, labour [SS4] and taxation are just a few examples.

Beyond the obvious political challenges, investors also must weigh up on-the-ground considerations such as quality of resources on offer in developing countries such as India.

Real-world challenges

China enjoys a clear edge over India in precision manufacturing and high-end technology, raising concerns that a shift in the manufacturing process could lead to a degradation in final product quality.

China specialises in contract manufacturing on a global scale and possesses the machinery and production knowledge—based on US- and EU-specific certifications and licences—required for supplying products to those markets. This infrastructure and industry knowledge is limited in low-export countries such as India.

Investing in human resources, advanced technologies and adequate infrastructure is a long process and raises the important question of whether the world is willing to adjust to a new work-in-progress manufacturing hub.

In order to attract FDI, China created special economic zones (SEZs) that had specific free market–based rules and regulations geared towards facilitating ease of doing business.

These served to offset investment drawbacks such as forced technology transfers and internet censorship to the point they have not been considered serious disadvantages in years.

Companies contemplating a move out of one these SEZs must also consider whether escaping the aforementioned disadvantages of operating in China outweighs the political stability offered by the one-party system. India, by contrast, has a history of rapidly changing regulatory and policy decision-making.


India represents an attractive investment destination, owing to the size of its domestic market, a strategic geographical location between Europe and the Far East and the government’s increasingly pro-business political agenda.

But several challenges to investing in the country remain, and companies need to consider these carefully when deciding whether to relocate supply chains to India completely or adopt the China Plus One strategy, which advocates diversification of international supply chains to avoid concentration risk. The Sino-US trade war will continue to drive corporate strategies in this space, and companies must focus on leveraging benefits offered by China and India within a cross-border supply chain.

The Indian government has unveiled fiscal and regulatory measures geared at raising its status as a global centre of manufacturing. These have already had the desired effect of winning investment in domestic manufacturing capacity. However, New Delhi’s race to revamp its regulatory environment could muddy the waters for new investors. The government needs to ensure that the focus of its efforts remains on not just the ease of doing business but also the ease of entry.

Investors stand to benefit greatly from India’s rapidly evolving policy initiatives, so long as they are careful to balance the rewards of entering a new market with the inherent risks posed by such a move.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position or policy of Berkeley Research Group, LLC or its other employees and affiliates.

Abhijit Yadav

Principal, head of Global Investigations + Strategic Intelligence practice in South Asia

Abhijit Yadav heads BRG’s business in South Asia and focuses on BRG’s Global Investigations + Strategic Intelligence practice, based in Mumbai.

He has extensive experience in advising

PE funds, financial institutions, institutional investors and large commercial entities on pre-investment risks, post-investment risk mitigation and monitoring.

He is well versed in conducting a wide range of investigative assignments, including fraud, business intelligence, and Foreign Corrupt Practices Act investigations for a host of multinational and domestic Indian firms.



[i], Business Standard, September 15, 2020 [ii], The Economic Times, updated 12 July, 2016 [iii], IBEF, updated June 2020

[iv], MEITY, updated July 1, 2020

[v], MEITY, updated July 1, 2020

[vi], PIB, October 6, 2020

[vii], The Hindu Business Line, July 23, 2020

[viii], Hindustan Times, September 10, 2020 [ix] Business Standard, March 11, 2020

[x], The Economic Times, February 1, 2020 [xi], Mint, May 1, 2020

[xii], UNCTAD, June 16, 2020

[xiii], Genimex Group, September 16, 2020 [xiv], Business Standard, July 31, 2020

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