Make in India: A Misplaced Belief?

The infrastructure woes and global weakness will hamper the ‘Make in India’ potential

“Come, make in India”, Prime Minister Narendra Modi’s statement seems ironical when seen against the backdrop of India’s 142nd rank out of 189 nations on the ‘Ease of Doing Business’ index of the World Bank. It remains to be seen how effectively India will be able to realize the ‘Make in India’ potential by tackling the infrastructural inadequacies in power, transport and governance. Further, the export orientation and import substitution aspects of the campaign will make it difficult to realize the ‘global manufacturing hub’ dream.

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Fig.1: Make-in-India initiatives in the Financial Budget 2015-16 [Source: Financial Express]

The Opportunities

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While the timing may not be right for achieving high exports, an attempt can be made towards a ‘Make for India’ policy. As Mr. Raghuram Rajan rightly claims, this inward looking policy can allow India to grow independent of the global slowdown. However, this policy does not relieve the government of the responsibility of resolving the infrastructural inadequacies. To enable the manufacturing units to prosper, the government will have to set up quality certification agencies and marketing platforms that will allow these units to efficiently sell their products. At the same time, the creation of a stable business environment with simplified tax laws is essential for developing a unified national marketplace.

A lot of steps have already been taken in the direction of improving the business environment. These include simplification of processes for business registration and environmental clearances. Attempts have also been made towards developing investor friendly tax regimes, labor laws and land acquisition policies. Modi’s ‘Ten Point Plan for India’ focusing on bureaucratic confidence and economic reforms, if implemented, can contribute significantly towards further improving the business environment.

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Fig. 2: Make in India – Sectors currently being pursued

Another important factor that will enable India to establish its global competitiveness is its low manufacturing labor cost. The average hourly manufacturing labor cost in India is $0.92 as against $3.52 in China. With increase in minimum wages in China and a dearth of large labor forces in other South East Asian countries, India seems to provide a feasible low-cost labor alternative to many investing countries.

Moreover, the improvement in foreign relations with dominant investor nations will ensure the influx of funds required to tackle the infrastructural bottlenecks and to develop the domestic manufacturing base. Recently, India has been able to obtain investments worth $57 billion from China and Japan that will be used for improving the transport network in the country.

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Fig. 3: Firms who have expressed their interest to Make in India in the last few months

The attempts towards improved governance through policy stability, reduced corruption and better international relations should ensure the availability of adequate foreign funds in India that can be used to improve the state of scientific research and to increase the supply of public goods. It is equally important to make investments and improve labor productivity in the agricultural sector to prevent the industrial growth from being self-defeating. In the context of looking for markets to sell the goods, India has to focus on domestic markets in the initial years. In the medium to long run, when the global economy recovers fully from the meltdown, India can start to pursue export optimism and establish a stronger international market presence. The presence of inexpensive labor will further contribute towards making the Indian goods competitive in the international markets. If this growth trajectory is followed, then in the years to come, India will be able to achieve the dream of establishing itself as a global manufacturing hub, surpassing the growth rate of several economies, including that of China.

The Challenges

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The acronym FDI is now being used by Mr. Narendra Modi to propagate his new mantra of ‘First Develop India’ with a view to attracting foreign capital. The biggest challenge in this respect is the creation of a healthy business environment – one that is characterized by policy certainty and an efficient clearance mechanism. This has to be supplemented with investments in public goods to ensure optimal availability of electricity, water, transport and communication facilities. Given the RBI’s resistance to reducing interest rates to manage inflation and the government’s efforts in reducing the fiscal deficit, talks of improving the investment climate remain at best paradoxical. It is also unlikely that private capital can be leveraged for building infrastructure, given the long gestation periods and past losses of public-private partnership models.

Another critical challenge is the outward orientation of the policy. At a time when the global economy is still recovering from the crisis, a huge dependence on exports is a far-fetched dream. The only way to capture the international markets is by acquiring the market share of other existing players like China. This seems difficult, if not impossible, given the huge gap that exists in infrastructure and output per worker in India and China. The situation seems worse when looked at in light of the ‘Make in China’ campaign launched by China to retain its manufacturing dominance in the international markets.

The tenability of the proposed model poses another major challenge. The focus on import substitution is fallacious, as India will have to necessarily opt for high-tech imports and scientific research if it has to compete with global manufacturers. The scope for generating research domestically remains bleak given India’s rank of 76 by the Global Innovation Index. Moreover, import substitution only results in reduced competition, inefficient production and higher prices for consumers. In this context, India must not forget that excessive focus on import substitution can be self-defeating as shown by the post-independence import substitution policy that resulted in the balance of payment crisis of 1991. More so, going by the predictions of the Lewis Growth Model, the ‘Make in India’ proposal seems economically infeasible. As the labor force moves from labor-surplus primary sectors like agriculture to manufacturing, the average output and wages in the primary sectors increase and this results in higher manufacturing wages due to rising opportunity costs of workers. This can be offset through infrastructural investments in agriculture resulting in an increase in the output of the sector. Alternatively, anti-labor policies can be instituted to forcibly keep the labor wages low in the manufacturing sector. However, the former move will require public investment that is unlikely owing to fiscal reforms and the latter may result in labor force deterioration in the long run.

References:

Roberts, Adam (September 25, 2014). Time to make in India? The Economist. Retrieved from: http://www.economist.com/blogs/banyan/2014/09/india-s-big-manufacturing-push

Pandey, Avaneesh (October 21, 2014). Narendra Modi’s ‘Make In India’ Campaign Seeks To Captivate Young Consumers: Report. International Business Times. Retrieved from: http://www.ibtimes.com/narendra-modis-make-india-campaign-seeks-captivate-young-consumers-report-1708392

Einhorn, Bruce (November 6, 2014). India vs. China: The Battle for Global Manufacturing. Business Week. Retrieved from: http://www.businessweek.com/articles/2014-11-06/india-vs-dot-china-the-battle-for-global-manufacturing

Bhupta, Malini (December 5, 2014). India’s GDP growth will overtake China’s over 2016-18: Goldman Sachs. Business Standard. Retrieved from: http://www.business-standard.com/article/economy-policy/india-s-economic-growth-will-overtake-china-s-over-2016-18-goldman-sachs-114120400588_1.html

Dey, Sudipto (July 19, 2014). India slips 10 places in Global Innovation Index. Business Standard. Retrieved from: http://www.business-standard.com/article/economy-policy/india-slips-10-places-in-global-innovation-index-114071900148_1.html

The ‘Make in India’ Shove (October 11, 2014). Economic and Political Weekly. Retrieved from: http://www.epw.in/system/files/pdf/2014_49/41/The_Make_in_India_Shove.pdf

Make for India better approach than Make in India: Raghuram Rajan (December 12, 2014). Live mint. Retrieved from: http://www.livemint.com/Politics/nEPZGnUMtLN3o86upKbPsI/Raghuram-Rajan-questions-Modis-Make-in-India-strategy.html

Industry leaders laud government initiatives to improve ease of doing business (November 29, 2014). The Economic Times. Retrieved from: http://articles.economictimes.indiatimes.com/2014-11-29/news/56561266_1_investment-climate-dipp-chandrajit-banerjee

Narendra Modi’s 10-point plan for India (May 30, 2014). Live Mint. Retrieved from: http://www.livemint.com/Politics/PWOXZpZVucoOD4FdQK6noO/Narendra-Modis-10point-plan-for-India.html

India ranks 142 in latest “Ease of Doing Business” report: World Bank (October 30, 2014). The Economic Times. Retrieved from: http://articles.economictimes.indiatimes.com/2014-10-30/news/55595402_1_india-ratings-business-environment-dk-pant

Ray, D. (1998). Development Economics. New Jersey, NJ: Princeton University Press. Retrieved from: https://books.google.co.in/books?id=GKr5RxWT4uAC&printsec=frontcover&dq=debraj+ray+development+economics&hl=en&sa=X&ei=qMiuVK-LEYTluQTJnIBo&ved=0CBsQ6AEwAA#v=onepage&q=debraj%20ray%20development%20economics&f=false

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Avnee is a second year student at IIM Ahmedabad. She has completed her summer internship with Boston Consulting Group. She is a graduate from St. Stephen’s in B.A. (H) Economics and has worked with Citibank for two years as an Assistant Manager. A wildlife enthusiast, TT player & avid writer, she has led 15+ student initiatives.