India’s manufacturing sector is struggling to attract foreign direct investment (FDI), according to a recent study by the Global Trade Research Initiative (GTRI).
The report reveals that manufacturing accounts for only 30 per cent of the country’s total FDI inflow, highlighting a significant imbalance in the distribution of foreign capital across sectors.
The study shows that India’s FDI is disproportionately directed towards trading, services, malls, and real estate development. This trend has left critical sectors like electronics and technology underfunded, potentially hampering India’s ambitions to become a global manufacturing hub.
The GTRI emphasises that India must offer a more competitive cost structure to attract businesses that are shifting from China or looking for alternative production locations.
One of the key challenges identified in the report is the higher cost of raw materials for non-traditional manufacturing in India. This is primarily due to import dependence and high tariffs.
In contrast, China benefits from lower costs due to large-scale production and efficient supply chains, while Vietnam offers competitive costs with low tariffs on imports.
Labour costs present a mixed picture. While India’s skilled labour costs are lower than China’s, averaging about USD 2 per hour compared to China’s USD 3 to USD 4 per hour, Vietnam has the lowest labour costs at around USD 1.5 per hour. This puts India in a middle position in terms of labour cost competitiveness.
Industrial energy costs in India are another area of concern. The cost ranges from USD 0.08 to USD 0.10 per kWh, which is higher than both China’s USD 0.06 to USD 0.08 and Vietnam’s USD 0.08 to USD 0.09 per kWh. This higher energy cost adds to the overall production expenses for manufacturers in India.
Despite significant investment, India’s infrastructure and logistics still lag in efficiency compared to its competitors. China boasts advanced infrastructure and transport networks, while Vietnam is making notable investments in ports and roads.
This infrastructure gap affects India’s ability to offer efficient supply chain solutions to potential investors.
Financial costs in India are the highest among the three countries compared in the study. With lending rates around 9-10 percent, India faces a significant disadvantage compared to China’s 4-5 per cent and Vietnam’s 7-8 per cent. These higher financial costs can significantly impact the overall cost of doing business in India.
To address these challenges and improve its attractiveness to foreign investors, the GTRI recommends several measures. These include inviting top global firms as anchor manufacturers, developing effective coordination with lead investors, providing ready-to-manufacture space, ensuring quick factory-to-ship movement, and guaranteeing policy predictability while reducing arbitrariness.
The study also emphasises the importance of setting up quick dispute-resolution systems to boost investor confidence.