New Delhi’s “Make in India” agenda has undoubtedly attracted leading global players who may once have thought India not worth the effort. Companies including Samsung, Hyundai, Dell and Micron, as well as key Apple suppliers Foxconn, Pegatron and Wistron, have all been awarded subsidies under India’s Production-Linked Incentive (PLI) or similar schemes.
The PLI will earmark around US$25 billion towards companies who meet expanded production targets across 14 sectors. As well as foreign investors, leading local conglomerates Tata, Reliance and Adani, have been major winners. But big-ticket investments don’t always equate to job creation in quantities commensurate to India’s needs. Though estimates vary, India’s youth unemployment rate is estimated to be between 20 and 40% depending on the criterion. This figure is disconcertingly high on any measure. It is even more alarming when combined with India’s low labour participation rate (55%), and the fact that at least 40% of India’s workers are employed in the typically inefficient agricultural sector.
The politically inconvenient reality is that world-leading growth rates of 8% have been disproportionately driven by less labour-intensive services sectors.
Despite it being difficult to draw conclusions with much certitude in a country as heterogenous as India, the results of the 2024 national elections seem to attest to the growing electoral salience of unemployment. Jobs have long been identified as the potential feet of clay for the otherwise unassailable Prime Minister Narendra Modi.
The politically inconvenient reality is that world-leading growth rates of 8% have been disproportionately driven by less labour-intensive services sectors. It is partly for this reason that Modi’s government has been criticised for putting undue emphasis on stimulating investment in perceivably higher-tech sectors such as electric vehicles, batteries, semiconductors and solar panels. These sectors are undoubtedly in vogue. Their strategic cachet has been amplified by the G7 and partners’ de-risking agenda. But they are unlikely to precipitate the jobs boon that India needs.
Take the solar industry. India has made some genuine progress as an alternative supplier of solar panels. In 2023, it sent 97% of its solar panel exports to the United States. Despite its global dominance, China’s vertically integrated and increasingly automated solar supply chain has only added 300,000 jobs since 2011.
The obverse of India’s high-tech “leapfrogging strategy” has been the relative decline of the export competitiveness of labour-intensive sectors such as textiles, garments, leather, apparel and jewellery. In some of these sectors, India has actively ceded market share to Vietnam and Bangladesh. Although they might not provide as felicitous ribbon-cutting optics, industries such as textiles are much better placed to absorb large pools of semi-skilled labour. It was no accident that South Korea’s industrialisation – perhaps the most rapid in human history – initially focused on sectors such as textiles and apparel before targeting heavy industry.
The good news is that New Delhi is actively considering re-tooling the PLI to focus on more labour-intensive sectors, perhaps as soon as the next budget in late July/early August. However, India’s problems appear to be much more fundamental than the strategic orientation of subsidies.
Simply put, India has still struggled to put in place the rudiments required for a more conducive business environment.
Concerning foreign direct investment (FDI) figures belie the Modi government’s boosterish rhetoric. According to the Reserve Bank of India’s own numbers, FDI as a percentage of GDP has fallen from 1.7% of GDP in 2016 to a touch over 0.5% currently. FDI is also falling in real terms, dropping 37% from the previous year to around US$27 billion in 2023–24. This is not just a problem afflicting foreign business, with private investment as a whole being tepid. Manufacturing’s contribution to GDP remains at around 13%, down from 17% in 2010 and well below the government’s target of 25%.
Simply put, India has still struggled to put in place the rudiments required for a more conducive business environment. This has not always been for a want of trying. The Modi government has rapidly accelerated pre-existing efforts to build out India’s infrastructure and signed India’s first (albeit limited in scope) free trade agreements in more than a decade. Modi has also made pro-business reforms including ending retrospective taxation and lowering corporate tax while clipping the wings of the bureaucracy – which played a notoriously stifling role during the Licence Raj era.
Progress on deeper structural reforms, including liberalising agricultural markets and streamlining India’s 24 labour codes and its land acquisition rules, has mostly proved elusive. These reforms are invariably highly politically contentious, including among core elements of Modi’s constituency. To protect domestic manufacturers, Modi has also added tariffs on thousands of goods categories. While this might benefit individual companies, it is not without adverse effects at the macro level.
None of this is lost on the government. Anticipating a strong election result, Modi had been planning to revitalise India’s moribund reform agenda. Whether a chastened Modi now has the political capital (and buy-in from new coalition partners) to stay the course, remains to be seen. A more fundamental question is whether, with increasing robot density globally and China piling resources into both higher and lower value-added sectors, manufacturing can play the jobs creating role that it once did.
