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New report suggests India’s local manufacturing sector is struggling

Investment in India's local manufacturing industry is drying up.

Earlier this month, Samsung announced that it opened a new manufacturing plant in India capable of producing 120 million handsets a year — making it the largets phone factory in the world. The move is a win for Narendra Modi's "Make in India" initiative, which is designed to facilitate foreign investment in India's manufacturing industry.

The government's goal is to get manufacturing industry to account for 25% of the economy, but it looks like it isn't close to meeting that target. A new report from Bloomberg suggets the manufacturing sector hasn't seen a meaningful boost in the last four years, with investments declining and more and more projects failing to take off the ground.

The Modi government is betting big on the manufacturing sector to boost the economy and create millions of jobs. Over the last four years, the government rolled out a series of incentives to lure companies to set up factories in India, which included giving away wide swathes of land to set up the facilities, and free electricity.

And when that didn't work, it introduced regulation that made it harder for the companies to do business in India. To boost local manufacturing in the smartphone segment, the government imposed a 15% duty on devices being imported into the country, affecting Apple's — which doesn't manufacture its latest devices in India — ability to compete effectively.

There's no infrastructure to support the manufacturing sector in India.

The latest data from the Centre for Monitoring Indian Economy show that investments in local manufacturing have declined to $96.6 billion in 2018, down from $270 billion in 2015. And while there have been a few key investments by foreign brands — like Amazon's $5 billion cash influx — they have gone to the services industry.

One of the main reasons for foreign investments drying up is the fact that there's no infrastructure to support manufacturing. India lacks the skilled labor and the factories to manufacture key hardware components like the PCB (printed circuit board) and displays. These parts are flown in from China or Taiwan and assembled in local factories — like the one Samsung built recently.

In fact, Xiaomi became the first company earlier this year to start local assembly of PCBs, so it's clear that the manufacturing industry has a long way to go before it is anywhere close to the same level as China. For now, it looks like the best way to see any meaningful growth is by focusing on the services sector. From Bloomberg Economics analyst Abhishek Gupta:

Job creation in India could hugely benefit if Make in India's focus is expanded to include more services, relative to its overemphasis on manufacturing," Gupta said. "India's tough labor laws and higher bureaucratic entry barriers into manufacturing, along with its widespread fluency in English -- a boon in global services -- suggests that its comparative advantage lies in services.

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