Make in India

Make in India for jobs and growth – Can Modi deliver the promise?

Prime Minister Narendra Modi has a talent for coining slogans that go viral. While Sabka Saath, Sabka Vikas and Swachh Bharat are meant for India, his Make in India call was meant for the world, and it has received global attention.
The cynical will say that it is yet another slogan that arouses expectations, but are not followed up with actions and soon forgotten. Like Garibi Hatao. Or Health for All by 2000, a slogan that was popular in the 90s, but few people remember today.
Will Make in India be different? Can Modi deliver? What is he lining up to make this happen? Is it too late to emulate China’s success story in manufacturing? Economists and analysts have been pouring on the subject in recent weeks.
The youth of India voted overwhelmingly for his party for his promise of jobs, development and good governance. Make in India appears to be his key strategy to fulfill this mandate.

Why revive manufacturing?

The need to revive manufacturing to fuel economic growth and create jobs has never been in question. About 10 million people enter the job market in India every year, which will mean 100 million jobs over the next decade. Growing a large manufacturing base is critical if India has to find jobs for its people.
The call to Make in India comes against a backdrop of declining share of manufacturing as a percentage of India’s GDP. The share of manufacturing as a percentage of GDP fell from 15.4 percent in 2001 to 12.9 percent in 2014. Government data indicate that the falling share of manufacturing in GDP has been accompanied by falling employment generation.

Converting bulge into dividend

India will have the world’s youngest workforce for the next three decades, while the rest of the world, including China, will be ageing. This ‘demographic bulge’ can translate to a ‘demographic dividend’ only if those who enter the youth who enter the job market find productive employment.

Economists talk of the dependency ratio which refers to the number of dependents (the very young and the retired who don’t work) as against the number of people in working age. India will witness a falling dependency ratio that can theoretically boost growth. That is because more workers with fewer dependents will translate to higher savings and investment, leading to a virtuous saving-to-growth cycle.

Job seekers largely unskilled

The demographic bulge will turn into a dividend only if the rising number of youths in India gets productive work. The bulge will turn into a disaster if people don’t get jobs. The NSSO data shows that a large proportion of youth entering the job market have only secondary school education who cannot aspire for services sectors like finance or IT, but can be trained for the manufacturing and construction industries.

Kenichi Ayukawa, Maruti Suzuki CEO, recently said that India has the potential to become the “biggest car manufacturer in the world” if factors affecting Indian competitiveness are addressed. “Costs of production in India increase because of various government policies, procedures, regulations and the way some of the laws are implemented,” he was quoted as saying

Is India ready for a manufacturing boom?

Sceptics of the  Make in India campaign point out that several attempts to revive manufacturing in India in the past did not gain traction. The government had set up a National Manufacturing Competitiveness Council (NMCC) in 2004. Its strategy paper released aimed at ramping up manufacturing share of GDP to 30-35 percent by 2015. In 2011, the government formulated a National Manufacturing Policy (NMP) aimed at raising the contribution of manufacturing 25 percent of GDP by 2022. A Wharton study noted that the figures did not change materially, only the target year has changed.

Modi’s luck, India’s advantage

While skeptics doubt if Modi government can make a difference this time, there is a near-consensus that the global winds are blowing in India’s favour. The question is whether Modi can hoist the sails in time.

Modi has been lucky. A confluence of economic undercurrents has come to his and India’s help.

  • GDP growth rate is picking up in India while it is projected to fall in most large markets.
  • The fall in global oil prices has helped push down push down inflation.
  • India’s current account deficit is down to about 2 percent of GDP from 5 percent last year
  • The rising confidence in India is reflected in the nearly 30 percent jump in BSE index.

Global pundits are confident that with the right moves, India can ride the next manufacturing wave. A McKinsey study says: “India’s manufacturers have a golden chance to emerge from the shadow of the country’s services sector and seize more of the global market. McKinsey analysis finds that rising demand in India, together with the multinationals’ desire to diversify their production to include low-cost plants in countries other than China could together help India’s manufacturing sector to grow six fold by 2025, to $1 trillion, while creating up to 90 million domestic jobs.”

India’s China advantage

Analysts forecast that massive changes in China’s economy will favour India. These include rising cost of production, shrinking labour force, an increasingly ageing population and the government’s desire to diversify and expand into high value and high technology industries like robotics and aerospace.

In textiles and apparel, for example, analysts predict that China’s domestic demand will overtake its exports in the coming decade, creating an additional $ 100 billion vacant slot in global trade which will favour other exporting nations like India, Bangladesh, Pakistan and Vietnam.

Huge domestic market

In one of his famous speeches, Modi said India is the only country that offers 3Ds: democracy, demography and demand. India, with its huge domestic market, is an attractive destination for industries in developed markets that are coping with recession or stunted growth.

The government is putting action behind the talk. Three high value industries – defense, railways and construction – have been opened up for global participation. Some of the highlights:

  • FDI cap in defense raised from 26 percent to 49 percent.
  • 100 percent FDI in defense allowed on case to case basis.
  • 100 percent FDI in construction allowed for high value projects like high speed trains.

Can doing business be easier?

India slipped in the World Bank’s latest Doing Business Index, ranking 142, the lowest among BRICS. The Modi government is moving in the right direction with some of its recent initiatives:

  • Applications for industrial licenses made online through a portal.
  • States directed to introduce self-certification and third-party certification under Boilers Act.
  • Defense components excluded from industrial licensing
  • Applications for environment clearances made online
  • A single electronics register for industries
  • Inspections only with the approval of head of the department

Roadblocks to new investments

While these are relatively easy, the real test for the government will be its willingness to undertake bold labour reforms that make entrepreneurs think twice before investing in India. India’s archaic labour laws are in fact a competitive advantage for competitors like Indonesia, Vietnam and Malaysia.

Overcoming the obstacles posed by India’s shoddy infrastructure – crippling shortage of power, bad roads and turnaround time in its ports – would take time. “Poor infrastructure, crony capitalism and corruption have likely done more to dissuade investment than labour laws,” says Janice Bellace, professor of legal studies and business ethics at Wharton.

Encouraging signals

Investors are looking forward to the budget to see how the government proposes to amend the existing laws to encourage investment. The signals are encouraging, for example, the government’s decision not to appeal the court judgments that favour Vodafone and Shell in their transfer pricing cases.

Airbus has announced a joint venture with Tata to manufacture military transport planes. Furnishing firm IKEA has announced that it will raise sourcing from India from Euro 315 m to Euro 630 m by 2020. It has even opened a website on ‘Make More in India.’

Securities firm Motilal Oswal sums up the change in a recent research report: “Most importantly, the Make in India program represents an attitudinal shift in how India relates to investors, not as a permit-issuing authority, but as a true business partner.”
Modi, as chief minister of Gujarat, showed that it is possible. Will India follow under his leadership?

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