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Modi's Make in India wins with Xiaomi but FDI, infrastructure a problem

Make in India, the program that is the centerpiece of the Indian government's drive to attract fresh foreign investment and spur job creation, has scored some early wins, but shortcomings may stymie future successes.

Introduced in September 2014, Make in India is Prime Minister Narendra Modi's ambitious initiative to transform India into a global manufacturing powerhouse – a field dominated by China over the past three decades.

Since the program's launch, Modi has pulled out all the stops to court business leaders, traveling to France, Germany, the U.S., the U.K. and Canada to personally pitch the campaign.

The drive has had one big early success story: Chinese smartphone maker Xiaomi, which counts India as its second-largest market globally after China, has set up a manufacturing center on the subcontinent. Overall, India is expected to soon supplant the U.S. as the world's second-largest smartphone market after China.

"We announced our Make in India plans in the beginning of this year," Manu Jain, chief executive of Xiaomi India, told CNBC. "We thought it would take us two years to set up this manufacturing plant. But surprisingly we were able to set up everything and our production started within seven months."

That's stunningly fast for India's famously slow-moving bureaucracy, and Jain credits cooperation from Xiaomi's partners as well as the state and central governments for the speed.

Xiaomi, in a tie-up with Taiwan-based contract manufacturer Foxconn, is manufacturing one of its best-selling products in India, the Redmi 2 Prime smartphone.

"When you import goods from another country, the lead time for you to order and bring goods to India is much higher, while if you manufacture in India, the lead time gets reduced, say from four to five weeks to two to three weeks," Jain explains.

That was a key reason for the decision to "make in India," he said, noting that the company also wanted to be closer to its Indian consumers so that it could respond more quickly to changing demand. Jain noted that Xiaomi made its move into India even before the program was expanded with more tax benefits.

Jain is very positive on Modi's program.

"It has been a great step for us. I would actually encourage a large number of companies, whether they're in smartphone or in other areas also to consider this kind of first step," Jain said.

But not everyone has seen such quick success with the program, and analysts point to a slew of reforms that are needed to make foreign direct investment (FDI) into India more attractive.

On Nov. 10 the government announced a raft of fresh measures to ease foreign direct investment (FDI) restrictions, including allowing more funds to flow into protected sectors such as e-commerce and banking, as well as permitting the Foreign Investment Promotion Board to approve projects worth up to 50 billion rupees ($756.1 million), up from 30 billion rupees previously.

"To make India a more attractive investment destination, wider-ranging reform is needed," Shilan Shah, an economist at Capital Economics, said in Nov. 11 note. "Two of the most important areas are easing land acquisition laws and simplifying domestic tax policy. Unfortunately, prospects for reform in both of these areas have taken a hit following the unproductive monsoon session of parliament and, more recently, the (ruling party) BJP's chastening defeat in the Bihar state assembly election."

That election had offered a chance for Modi's Bharatiya Janata Party (BJP) alliance, which has faced pushback on its reform drive, to pick up some seats in the upper house of parliament, where it lacks a majority. The overwhelming loss in the country's third-most-populous state was seen as a potential sign that the wave of optimism that Modi rode to power may be slipping.

That's a concern for businesses trying to decide whether to enter the Indian market based on the prospects that reforms and much-needed infrastructure projects will proceed.

Others have also noted that when it comes to doing business, India isn't quite ready for the big time. The World Bank's ease of doing business survey, released in October, has ranked India at 130 out of 189 countries.

"There's still 129 places in the world that are actually easier to do business with than in India right now, which is quite disappointing given the opportunity that exists," Sanjay Bailur, managing director in India for business advisory firm AlixPartners, told CNBC.

He cited "huge issues" for companies looking to make a strategic decision to expand in India, including poor infrastructure and difficulties sourcing goods.

Employees assemble a Royal Enfield Motors Classic 350 motorcycle moving on a conveyor on the production line at the company's manufacturing facility in Chennai, India.
Dhiraj Singh | Bloomberg | Getty Images
Employees assemble a Royal Enfield Motors Classic 350 motorcycle moving on a conveyor on the production line at the company's manufacturing facility in Chennai, India.

"Given the tight profit margins that a lot of these companies are running to, given the cost pressure in terms of maintaining pricing at a low level to satisfy local needs, it is a challenging area to try to maintain the business and make it successful within the constraints of an economy like India," Bailur said.

Rather than making products in India for export - which requires navigating not just poor infrastructure but also complex foreign exchange rules - Bailur said may be easier for companies to first make products in India for the local market.

"Whilst I think the Make in India campaign will work in the long term, it is something that is a positive thing for the country, I think the initial step really should be a 'make for India,'" he said. "There's a large domestic market with increasingly affluent consumers."

Some companies that have made the strategic decision to put money into India have received a mixed reception for their efforts.

Rio Tinto, for one, has "seen the 'good' and the 'needs to improve' category," Alan Davies, the company's CEO for diamonds and minerals, told CNBC.

The company has a diamond cutting and polishing partnership in Gujarat, employing around 250,000 people to handle diamonds from its Argyle diamond mines in Australia, which are generally exported from India for sale globally.

Rio Tinto has had some slow-moving success on its efforts to bring the Bunder diamond project in Madhya Pradesh - a decade-old find - to production. Davies told CNBC that the government has provided good support and the company was in the final permitting process.

He hopes to market the diamonds to Indians as an additional gift along with the traditional choice of gold when giving gifts for special occasions such as weddings.

But it's a different story with Rio Tinto's Orissa iron-ore joint venture in the Odisha province, with the company spending around two decades trying to get project approvals.

"We've had some examples where the decision-making has been extremely slow," Davies said.

It isn't clear if efforts to eliminate many business headaches will succeed, despite Modi's best efforts.

Amid a tough September for the reform agenda, Finance Minister Arun Jaitley announced that the government had abandoned a plan to call a special session of parliament to secure approval for the implementation of a goods and services tax (GST) because it lacked political support.

The GST has broad support from businesses, in hope it will streamline India's tax administration by replacing a myriad of complex taxes charged by the 29 states with a uniform nationwide levy.

Modi has also faced fierce protests against his efforts to overhaul stringent labor laws to give companies more flexibility to hire and fire. And he was defeated on a controversial land acquisition bill that would make it easier for businesses to buy farm land for infrastructure and industrial projects.

But there are hopes the FDI reforms announced in November and other small steps will produce results.

Success stories, such as Xiaomi's, are likely to help.

"It has been a great step for us," Xiaomi's Jain said. "Most of us are confident that over the next few years, India will become a manufacturing hub and many multinational companies, international companies should take advantage of the all the benefits the government is providing."

- Ansuya Harjani contributed to this report