Make in India Initiative: Are We on the Right Track?

By Deepak Parvatiyar

May 30, 2015

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On 15 August 2014, Prime Minister Narendra Modi had given a clarion call – ‘Make in India’ – to the entire world from the ramparts of the historic Red Fort in New Delhi.

The concept caught the imagination of the world for various reasons including the following:

a) Skilled workforce – India’s 500-million labour force includes English-speaking skilled workers.

b) Low labour costs – A U.S. Bureau of Labor Statistics study showed that average labour compensation (including pay, benefits, social insurance, and taxes) in India’s organised manufacturing sector increased only marginally from $0.68 an hour in 1999 to $1.50 an hour currently. In comparison, the average compensation in China’s manufacturing sector has risen by 20 percent year-on-year in the same period to $3Make in India Initiative: an hour.

Already, top technology firms such as GE, Bosch, Tejas and Panasonic have confirmed their decision to invest in the electronic, medical, automotive and telecom manufacturing clusters in India. The Indian government claims to have received 57 investment proposals worth over US$ 3.05 bn of which 30 proposals worth US$ 1.04 bn have been approved.

Achievements of ‘Make in India’ Initiative So Far

A report by India Brand Equity Foundation (IBEF), a Trust established by the Department of Commerce, Ministry of Commerce and Industry, lists the following major achievements of the ‘Make in India’ initiative thus far:

• Clean energy investments in India increased to US$ 7.9 bn in 2014.
• Samsung Electronics Co. Ltd. has invested Rs 517 crore (US$ 83.11 mn) towards the expansion of its manufacturing plant in Noida, Uttar Pradesh (UP) under the UP Mega Policy.
• IKEA plans to double sourcing from India to €630 mn (US$ 688.61 mn) by 2020.
• Sanofi SA, which acquired Shantha Biotechnics, will invest Rs 460 crore (US$ 73.93 mn)for building a facility to manufacture Insuman, an insulin product to treat diabetes.
• BMW and Mercedes-Benz have intensified their localisation efforts to be part of ‘Make in India’ initiative.
• Suzuki Motor Corp. plans to make automobiles for Africa, the company’s next big bet, as well as India at its upcoming factory in Hansalpur, near Ahmedabad, Gujarat.

Legitimate Concerns Over Prospect of ‘Make in India’ Initiative

This sounds good. However, in the domestic circles, the ‘Make in India’ initiative has triggered a debate even within the government for a clarity on the issue. While Defence Minister Manohar Parrikar called for a separate policy on ‘Make in India’ to address the existing confusion on the Defence Procurement Procedure, the Reserve Bank of India Governor Raghuram Rajan, on his part, reminded the government “…that mix of good regulation, good infrastructure, good human capital has not been present in this country. The end result we have is that we have underperformed on manufacturing”.

Parikkar’s as well as Rajan’s concerns largely revolve around getting the basics right to ensure the success of the Make-in-India concept. Rajan, in fact, goes a step further to suggest that the focus of the initiative should not be entirely on outside markets because “… if the world is growing slowly, there would not be as much demand as when the world is growing fast”.

Expectedly, the Opposition Congress party, too, has pitched in to term the ‘Make in India’ initiative as, in the words of the Congress Vice-President Rahul Gandhi, “a big zero”. To support this claim, Gandhi asked, “How many people have got jobs in one year?”

Such concerns are quite understandable given the fact that India’s manufacturing sector contributes just 16% to country’s GDP – the same as it was in the 1960s! Besides, India’s share of global manufacturing stands only at little over 2% as compared to China’s 22.4%.

Factors That Dwarfed Industrial Growth

Besides, this is not the first time India is focussing on its manufacturing sector. Even the erstwhile UPA government had put out a national strategy for manufacturing and declared 2006-15 the “decade of manufacturing in India”. The effort did yield initial success when the period between 2005-06 and 2009-10 saw a healthy 10% growth in the manufacturing sector. However, in 2012-13, it grew barely one per cent and in the following year, factory output came down to – 0.7%.

Global recession, populism, red-tapism and corruption are largely responsible for the stagnated growth of Indian industries.Crony capitalism as well as government’s protection of small enterprises resulted in the absence of medium-sized firms – termed as ‘missing middle’ by economist Anne Krueger. This trend adversely impacted economies of scale and proved detrimental to the growth of the manufacturing sector which could never pick up also because of factors like poor road connectivity, erratic electricity supply and outdated labour laws.

It may be pointed out here that India was the only country in the world to bypass the manufacturing phase as it moved over from an agrarian economy to a service economy. This was primarily because of the liberalisation of the service sector for exports in the 1980s, and the presence of a large English-speaking population.

Ambitious Growth Target

The country now sets for itself an ambitious target of increasing the contribution of manufacturing output to 25% of GDP by 2025. This is a huge task. However, as a report by McKinsey & Company suggests, manufacturing sector in India does have the potential and it could touch US$ 1 trillion by 2025. If this is achieved, it would create around 90 mn domestic jobs by 2025.

However, this requires not just a cautious approach as suggested by Rajan, but also simultaneous efforts to boost infrastructure. Consider the fact that China had entered the international manufacturing hub in early 80s but had accomplished remarkable success in rural electrification and universal health coverage during the era of Mao Tse-Tung back in 1960s. That enabled it to scale up productivity and the country offered itself as the factory of the world.

India still strives to accomplish such a feat. Hence, the task before Modi is to create infrastructure and bring legal reforms so that the ease of doing business is improved. It also requires a resolve to curb corruption, but the government’s delay in filling up vacancies in constitutional and statutory bodies such as the Central Information Commission, Central Vigilance Commission and Chief Election Commission – institutions meant to ensure probity in public life – proves otherwise.