Prime Minister Narendra Modi has given the clarion call for ‘Make in India’. The aim is to make India the manufacturing hub, thereby creating ‘solid’ growth and employment. The campaign is important and may likely shape the destiny of India (as also Modi), in the years to come.
Manufacturing has been the Achilles Heel in the India growth story. The India growth story has been a service–dominated one. Yet, it is growth in the manufacturing sector – contributing to almost 60 per cent of the inputs in the economy and 45 per cent of the service sector input needs – which sets limits to growth in the service sector, as also the overall economy.
Manufacturing growth rates have declined continuously since 2011/12, and were negative in 2013/14. With a weight of 75.53 in the Index of Industrial Production, it is the manufacturing sector which dictates the overall performance of the industrial sector. Within manufacturing, the capital goods segment has been the weak performer (compared to basic and intermediate goods) on the one hand. There has also been a drastic decline in the consumer durable segment by 12.2 per cent. This is in sharp contrast to global manufacturing gaining strength in 2013/14. Such poor performance of the domestic manufacturing sector has been attributed to low domestic per capita income, leading to weaker demand for consumer durables, as also slow project implementation and lack of new projects affecting the capital goods segment.
How would India match up to alternative destinations that might attract the global investor community? Does India have it in her to be the manufacturing hub of the world?
The key push factor to prompt a global relocation of manufacturing enterprise into India is the decline in the comparative edge that China had, as a destination for cheap labor-intensive activities. This is compounded by the fragility of its banking system, as also its markets still being subject
to several limiting measures and barriers to
entry, along with investment rules that limit competition.
The strengthening yuan over the last three years has affected Chinese manufacturing export competitiveness adversely. Similarly, political issues with Japan have affected Japanese preferences for China as a destination for investments. China has, in fact, been losing its manufacturing jobs not only to other less developed countries like Bangladesh and South East Asia, but also to developed countries. Can the Chinese decline mean a bonanza for Indian manufacturing? Not unless we fix certain serious issues affecting doing business in India and Indian competitiveness compared to the rest of the world! Simply put, we have to be able to pull investments better.
Lacking in pull
India has slipped down 11 places in competitiveness rankings in one fiscal year – 2014/15, while Its BRICS counterpart- Russia, has moved up 11 places from 64 to 53rd rank. Our high fiscal and current account deficits and its macroeconomic stability would make global investors wary, despite being the third largest sized market in the world. The ‘digital divide’ which makes India one of the world’s least digitally-connected countries affects competitiveness as well. India’s rigid labour laws, which penalise companies for hiring permanent labour, render labour markets inefficient and affect competitiveness. Poor infrastructure and corruption have long been cited as the prime reasons deterring business.
However, Indian business has cited problems related to access to finance, tax rates and foreign currency regulations (cited as the eighth, ninth and 11th most problematic factors in 2013/14) as the three most problematic factors in the Global Competitiveness Report 2014-15.
Agenda for success
While the government has announced a number of facilitating moves, the moot question remains – will the global investor community bite? And if so, what sort of a manufacturing hub would India be? India can choose a growth trajectory based on manufacturing high-value items, and not simply fill in the space vacated by China.The agenda to improve competitiveness at this stage should include:
•encouraging massive investments (both public and private) in Research and Development,
•bringing about legal reforms to ensure speedy judicial processes and especially aimed at protection of Intellectual Property rights.,
•integrating financial markets and a single financial regulator to streamline activities,.
•introducing labour reforms to make the labour market more flexible,
•simplifying regulations which affect the ease of doing business in India,
•implementing the Goods and Service Tax with immediate effect (GST) and
•increasing internet penetration countrywide. Lower-order factors – governance, primary education and health and so on, which bind India in a complex web of lower efficiency and productivity, need to be addressed urgently. However, these will eventually provide only diminishing returns. It is only innovation that can provide continued increasing returns.
The clarion call for ‘Make in India’ should be based on making India a manufacturing hub for high value products and services which will transform the India story altogether.