India will attract more foreign capital if it addresses key gaps

India’s demand scenario remains unclear to many global investors . Spencer Platt/Getty Images/AFP  (Getty Images via AFP)
India’s demand scenario remains unclear to many global investors . Spencer Platt/Getty Images/AFP (Getty Images via AFP)


Production incentives aren’t enough to lure the investments needed.

By the looks of it, Indian Prime Minister Narendra Modi’s manufacturing drive is on the up, with all the trappings of imminent success. Multinational companies and long-term foreign investors like private equity giant Blackstone have their sights on India. The recently unveiled budget boosts capital spending by more than expected. With a host of subsidies and sweeteners, firms like Apple Inc and Samsung Electronics are making big commitments to the country. Yet, a look at the Indian units of long-established multinationals shows how much help the industrial sector will need.

Consider publicly-listed ABB India Ltd, the domestic unit of European industrial firm ABB, that manufactures products for automation and electrification, along with other industrial equipment. Orders grew 4% in the latest quarter. However, that was lower than the 22% order uptick from India for ABB’s global parent. Why the gap? It accounts for supplies by ABB India in the domestic market and the imports of ABB to deal with the growing backlog, the company said in a statement.

ABB India isn’t alone. Global companies need their parent to meet rising local demand. In a recent earnings call, executives from Cummins India, a unit of Cummins Inc, said orders for a project with the Gas Authority of India would be taken by the parent entity and the local business would help with service support and installation. For most firms, big projects that are tendered out end up relying on overseas entities because many of the products and supplies aren’t available domestically, or in some cases, don’t meet global standards.

Don’t get me wrong, these firms are still doing well—as long as the orders keep coming in and firms are able to meet them, business hums along. For India’s industrial sector, however, this means many companies aren’t building out operations for new products. Organic growth doesn’t really happen until demand is established, either, and any supply chains that do develop are piecemeal. These are the holes Modi must focus on filling before private capital rushes in.

India’s longer-term solution is more localized production lines. In theory, high enough demand would mean domestic subsidiaries build factories on the ground that cater to growing needs for motors, gears and other such intermediate goods. But what is enough? Determining a critical mass of real demand is crucial before businesses plunge into investing in India—and that’s tough. ABB India last week announced plans to invest $121 million over the next five years, including a factory for gas insulated switch-gears that are used to manage power systems in substations, railways and industrial complexes. Last year, it opened a smart instrumentation factory to make a range of devices. Clearly, there is a growing need for infrastructure along with policy tailwinds. ABB, though, has been invested in India for a long time. For new companies entering India now, the runway is far longer. Despite production-linked incentives, the threshold for sales and upfront capital is far too high for medium-sized businesses to take advantage of subsidies. Firms are still exploring opportunities and shopping around states for spots.

Businesses need to be more open-minded to locations further out from urban areas and cognizant of the time it takes to set up, according to consultants at Roedl & Partner India. The southern states of Tamil Nadu and Karnataka are front runners, with their government-led investment boards driving incentives. In central Indian states, provinces are trying to push through the building of highways, hoping to spread the reach of roads and infrastructure to expand industrial areas.

Industries like electronics (including computer software and hardware) and automobiles (largely components) have drawn the bulk of the foreign direct investment in the country’s manufacturing sector, pointing to the concentration and fragmented nature so far.

To avoid becoming just an assembly line, India needs to spread the love by pushing supply chains further out. Geographical clusters focused on sectors much like China’s, deeper into the hinterland, would be one place to start. Manesar, a now not-so-remote area near Gurgaon, became an industrial hub and residential area because carmaker Maruti Suzuki set up a plant there. It boasts excellent sushi and Japanese restaurants, too. Drawing in companies that make vital yet smaller components, not just the big headline goods, would also help.

There’s a practical lesson for the executives rushing to India: Companies need to choose locations where other firms are already present, not states where the incentives look the best, or crowded and saturated urban centres. And, tread with care because there’s opportunity, just not where you’d hope.


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