By Sam Jochim, economist at EFG Asset Management
Now that Modi has entered his third term as prime minister, his next key ambition over the coming five years is to grow India’s manufacturing sector as a share of gross value added (GVA).
Since he first took office in 2014, the manufacturing sector has accounted for just under 20% of GVA. This is despite his party’s ‘Make in India’ initiative which aims to “transform India into a global design and manufacturing hub”.
One of the key pillars of this initiative is the Production-Linked Incentives (PLI) scheme, which was introduced in 2020. The scheme proposes financial incentives with the goal of boosting domestic manufacturing across 14 key sectors.
Its introduction was aligned with the release of an updated foreign direct investment (FDI) policy that aims to improve the ease with which foreign companies can invest in India.
However, the success of these policies is debatable. Although FDI has risen since the initiative was introduced in 2014, it has not risen as a percentage of GDP.
Indeed, most of the flows have not been into sectors that PLIs focus on. They only accounted for 31% of FDI from 2000 to 2013, but their share of FDI dropped to 26% when measured from 2000 up until 2022.
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There are clear areas for policy improvement in Modi’s next five-year term as prime minister. Import tariffs supposed to encourage local sourcing are reducing competitiveness in global markets.
It is notable, for example, that Vietnam and India accounted for roughly the same share of world mobile phone exports in 2010, yet Vietnam’s share was over four times greater than India’s in 2022.
Over the same period, India’s average tariff on mobile phone parts rose by around a third while Vietnam’s was unchanged, ending 2022 at almost half the level of India’s.
The signing of a free trade agreement (FTA) in March with Iceland, Lichtenstein, Norway and Switzerland represents a step in the right direction. Modi’s aim for India’s manufacturing sector to account for 25% of GVA by 2025 means it is likely that more PLIs are announced over the next year under a fresh push of the ‘Make in India’ initiative.
Accelerating infrastructure and clean energy
In Modi’s 2019 election manifesto, he pledged to construct 60,000km of national highways by 2024 and electrify all railway tracks by 2022. These goals have not been met.
At the end of 2023 there were 146,145km of national highways in India – 49,600km above the level in 2019 – and 94% of railways had been electrified by the start of this year. Despite not achieving the targets, the progress compared to the period before Modi was first elected in 2014 is significant.
Infrastructure development will remain a key area of focus for Modi in his next five-year term. However, it is not a sustainable policy to keep building roads at the same pace and there will be no railway left to electrify. The focus is therefore likely to shift.
One area of focus is likely to be building more electric vehicles (EVs). Electric cars currently have a 2% market share in India, highlighting the potential for growth.
Modi’s government approved a new EV policy in March that reduces import costs for foreign EV producers setting up manufacturing in India.
Narendra Modi’s re-election for a third term as India’s prime minister was confirmed on 4 June. Future policy will continue to focus on boosting the manufacturing sector, with new PLIs possible as part of the ‘Make in India’ initiative. Infrastructure investment with a focus on clean energy is also likely to be a key pillar of the BJP’s policies for the next five years.
One of the themes of Modi’s first two terms in office has been the setting of ambitious targets that are often not achieved. While this may continue, it is important to note that ambitious targets have often brought with them a significant acceleration in progress towards the government’s goals. While it should be acknowledged that there is room for policy improvement, India remains on the right path for a prosperous future.
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