Make in India: The Challenges Ahead

It has been a little over six months when on 25^th September 2014, PM Modi launched the Make in India initiative at a function in the Vigyan Bhawan, New Delhi. The slick campaign designed and run by Wieden+Kennedy (W+K) group (which had also worked on the Incredible India campaign) has seen unprecedented success in the virtual world. According to some reports, the Facebook page of ‘Make in India’ has become the most sought after government initiative ever on the digital media platform with a fanbase of over 3 million with the twitter handle too clocking a followership of over 340 K. In total, the initiative has already crossed 2 billion impressions on social media worldwide.

What exactly is Make in India?

Make in India initiative is aimed at making India a global manufacturing hub and reducing the dependence on costly imports by focusing on 25 selected sectors, which have strong potential for high growth and job creation. These sectors are Automobiles, Automobile Components, Aviation, Biotechnology, Chemicals, Construction, Defence Manufacturing, Electrical Machinery, Electronic Components, Food Processing, IT and BPM, Leather, Media and Entertainment, Mining, Oil and Gas, Pharmaceuticals, Ports, Railways, Renewable Energy, Roads and Highways, Space, Textiles and Garments, Tourism and Hospitality, and Wellness. This initiative is a belated attempt to correct the lopsided nature of Indian economy which without the intervening period of being a manufacturing-led economy straightaway jumped from a primarily agricultural economy to becoming a service- led economy.

This initiative doesn’t only have strategic implications with its focus on self reliance by making Indian industry a globally competitive one, but this is perhaps the only solution to the twin problems of poverty and unemployment that the country is facing and the only way to harness the demographic dividend. Unless jobs are created in newer fields (only possible in manufacturing), Indian economy won’t be able to provide meaningful employment to over 12 million youth who will enter the job market every year.  Also, agriculture is no longer able to support 65% percent of the population and its share in the economy is falling. The only solution lies in effecting a peaceful and swift transfer of population in large numbers from rural areas to urban, which means massive urbanization on a scale never experienced before, and from agriculture to industry, which will require an industrial revolution overshadowing the 18^th century phenomenon in terms of order of magnitude.

The changing paradigms  

In a country with a perennially worried visage, a country that is constantly bemoaning all the ill-luck that God and Pakistan have thrown at it and whose expressed national characteristic is an all embracing self-doubt and self-pity, it takes a visionary like PM Modi to inject optimism in the national discourse and refurbish an overused slogan like Make in India into a sort of national battle-cry around which all segments can rally. With this initiative, PM Modi has impressed two things upon the national consciousness –

1) the serious situation of unemployment, poverty and economic drift that the country is facing (which will only exacerbate if the present atmosphere of apathy, gloom and spiritlessness is allowed to continue), and

2) the self-belief in our capability to achieve these goals.

Reality Check

However, moving oratory and exuberance on the Internet is one thing and translating the vision on the terra firma is another. PM Modi has inherited the same work culture, the same processes, the same steel frame, the same personnel, and the same way of thinking which has made India the world’s top underachiever for the last two hundred years, and he has as yet not shown any urgency to change this status quo during the last ten months that he has been in power. That this is not going to work was very much in evidence during the presentations made by various ministries before the PM and the FM. It was the same old story of seeking financial incentives, tax holidays or tax rebates for boosting production.  Ministry of Steel even went to the extent of requesting steel to be kept out of Free Trade Agreements. This is not how a potential global economic giant should think and behave. It seems as if the system has no faith in the country’s ability to become a winner, all it can think of is to provide shelters behind which the country’s industries can hide and survive. There is no new thinking on how to make India the best competitive manufacturing hub in the world. Even the Finance Minister can’t think beyond highlighting the advantage of low cost labour that India has. There seems no awareness that competencies can also be created based on high technology, designing ability, high level skills, quality, and innovative products and processes. There is no urgency to tackle infrastructure and governance bottlenecks about which the country is talking about since 1990 but doing nothing beyond cosmetic retouches. This bureaucratic way of thinking and doing things is not going to take India far and it is certainly not what this initiative requires.

The Nokia saga

The closure of Sriperumbudur based Nokia plant (and its shifting to Vietnam), which used to manufacture 18 million mobile devices every month, and which fell  victim to tax dispute with the powerful bureaucracy, and the consequent loss of almost 30000 jobs, is an apt reminder that the biggest hurdle before PM Modi is internal and systemic. This action by the government looks ridiculous when 85% of the 300 million mobile sets that Indians will buy this year will be imported from Southeast Asian factories—even in the case of so called “Indian” brands like Micromax, Lava, Xolo, A1 etc.

Where does India stand?

The latest Global Competitiveness Report (2014-15) brought out by World Economic Forum  ranks India at 71^st position among a total of 144 countries. This report shows us the mirror regarding where we stand in the world and how difficult our pursuit for global leadership is going to be. This report can’t be spurned as another Western conspiracy (a common tendency) since it is based on the responses sent by CII which is an affiliate organization of WEF. What is even more worrying in the report is that India’s position has been continuously falling for the last six years and there is no visible effort to arrest this freefall. Another worrying element is that we don’t stand anywhere in terms of rank compared to the other BRIC (Brazil, Russia, India and China) nations.  According to the report, “The rank differential with China (28th) has grown from 14 places in 2007 to 43 today; while India’s GDP per capita was higher than China’s in 1991, today China is four times richer”.

How the world sees us?

The report has identified the most problematic factors for doing business in the country, some of which are given below:

·                     Access to financing   

·                     Tax rates 

·                     Foreign currency regulations  

·                     Inadequate supply of infrastructure  

·                     Corruption 

·                     Inefficient government bureaucracy  

·                     Restrictive labor regulations 

This is what the report had to say about India, “Continuing on its downward trend and losing 11 places, India ranks 71^st, the country’s new government faces the challenge of improving competitiveness and reviving the economy, which is growing at half the rate of 2010”.  To outline the lopsided nature of Indian economy, the report adds, “Overall, India does best in the more complex areas of the GCI: innovation (49th) and business sophistication (57th). In contrast, it obtains low marks in the more basic and more fundamental drivers of competitiveness”.

The difficulties that the the new government also becomes clear from the World Bank’s report where India’s ranks 186^th in terms of the enforcement of contracts, and 137^th in resolving insolvency. The World Bank has also ranked government effectiveness (on the basis of the quality and the implementation of capacity of the civil service) and sadly enough, India’s ranking is falling over the past decade from 55^th percentile in 2004 to 47^th percentile in 2013.

The major hurdles

Apart from the alarming situation in the social sector indicators like life expectancy, infant mortality, malnutrition, sanitation, extreme poverty, primary education, and governance, India’s biggest hurdles lie in Infrastructure sectors. Years of underinvestment and political inertia in combination with cumbersome administrative and environmental clearance processes and the all-pervasive inefficiency and corruption have left the country with a pathetic road transport system, choked ports, a fast deteriorating railway system, an overburdened loss-making aviation sector, electricity production that faces capacity constraints and consequent chronic shortages, and an inadequate, fragile and financially insolvent transmission grid that is characterized by frequent grid failures and highest transmissions losses in the world. As far as connectivity is concerned, the GCR says, “Despite mobile telephony being almost ubiquitous, India is one of the world’s least digitally connected countries”.

Growing trade and rapid urbanization are bringing all the fault-lines to the fore and the system lunges from one crisis to another. The reform process started with much fanfare in early 90s, has seen only indifferent outcome with government efforts being inadequate, foreign partnerships stalled, and private partnership falling much short of expectations. It is quite clear that the state centric approach to infrastructure development of building, owning, and managing projects is not working, but the noisy democratic circus with multiple vetoes ensures that alternatives with even small deviations are not allowed to emerge. 

Where is the money?

The Global Competitiveness Report has identified Access to Financing as the biggest problem and the government of PM Modi too seems to be alive to this need. A report by the erstwhile Planning Commission has pegged the need at $1 trillion for infrastructure development half of which has to come from non-governmental sources. With the commercial banks having already reached the exposure limits in this sector and given the Indian private sectors limited capabilities and average performance, FDI seems the one area that has to be tapped. But despite a slew of FDI limit enhancements in insurance (26 to 49%), defence (26 to 49%), and railway infrastructure (0 to 100%), FDI remains a politically divisive issue and after the poll debacle in Delhi elections, the new government is expected to curb its enthusiasm. Also, high inflation and high interest rates are other factors that are deterring domestic and foreign firms from investing in long-term infrastructure projects. In 2013, India has already seen the exit of 3i, the London based private equity, infrastructure and debt management firm which had the world’s largest India-dedicated infrastructure dedicated fund, from all its portfolio companies when its investments failed to meet investor expectations. India will need structural reform in the capital markets to create sources for long term funds but the recent RBI ban on bank purchase of new infrastructure bonds further limits PM Modi’s options.

PM Modi’s high profile meetings with global leaders have largely been geared to attract investments and he has seen good initial success. Chinese President Xi Jinping pledged $20 billion over the next 5 years mainly for modernization of Indian Railways and development of two industrial parks. Japan’s PM Shinzo Abe, which has been a major provider of funds for infrastructure projects in the past such as Delhi Metro, Delhi Mumbai dedicated freight corridor and Delhi-Mumbai Industrial corridor, has been more forthcoming with a pledge of $ 33.8 billion for various infrastructure projects over the next 5 years. However, the meeting with President Obama was not as successful even though it was high in terms of symbolism. Next month he is going to Europe where again the major focus will be on attracting investments.

Another major initiative that the new government has taken is to accord fast track regulatory approvals to hundreds of stalled projects which were mainly stuck awaiting environmental clearances. Many of these had involved huge FDI.

The coming urban boom and the related issues

Those days are long gone when India was equated with its 600000 villages. As per a Mckinsey report, urban India, which is home to 30% of population, contributed 57% to the country’s GDP in 2012, accounted for 43% of consumption and was home to 63% of its consuming class households. Out of this, 54 metro cities (with populations of over 1 million each) accounted for 40% of India’s GDP, 45% of its consuming class households and 37% of its consumption. By 2050 it is expected that 50% of India will live in urban conglomerates and will account for 75% of GDP. The importance of metros will also go up and it is expected that as early as 2025, 69 metros will house 78% of total urban population and contribute 77% of urban GDP.

This rapid urbanization is going to be the key to the success of Make in India initiative and the farm to factories push. The government is already working on a new model of urban development with its plan to develop 100 smart cities out of which work has already begun on 5 along the Delhi Mumbai Industrial Corridor. The other smart cities will also largely be located along the planned industrial corridors--1) Delhi-Mumbai Industrial Corridor 2) Chennai-Bangaluru Industrial Corridor 3) East Coast Economic Corridor with Chennai-Vizag Industrial Corridor as the first phase of this project and 4) Mumbai–Bangaluru Industrial Corridor. The 89 districts through which these corridors pass will play a central role in the Make in India push. These will witness large scale urbanization coupled with fast industrial development, both Greenfield and organic. Already several of these districts are seeing good amount of industrial development and in future they are expected to grow 10% faster than the rest of the country. 

To exploit this opportunity India will first have to overcome several internal challenges. Apart from the issues of land acquisition, environmental clearances, failing urban infrastructure and the need for several structural reforms, there is also another issue, that of governmental structure in the country. The 2-tier quasi-federal structure is a child of 1940s when cities were of little consequence. With growing importance of cities, it will become imperative to empower the municipalities and enhance the human resources at its command, if the quality of urban governance is to improve and cities are to become the drivers of India’s growth. This will require a constitutional amendment with consequent curtailment in the rights of the states—which is easier said than done.  

Conclusion

It is clear from the above that the challenge before the government is huge even though there is little doubt in the inherent capability of the country to achieve the goals. This government is attempting a growth miracle that historically few countries have managed to achieve. But the path that it is has chosen is correct as there is hardly any country other than the petro economies of Middle-East, which have become rich without creating manufacturing jobs. However, with growing competition from other developing countries, this quantum of industrialization is not going to be easy to achieve. It will require substantial changes on a wide spectrum and there are a lot of hurdles to cross before that happens. The government has started working on the low hanging fruits and the incremental issues, but the big bang will take time.  For the time being, it will be apt to conclude with what Rajan, RBI Governor, said in a speech—“In India, if you are looking for grand, big picture reforms it may take some time coming. But in terms of decentralizing, in terms of doing the small stuff which adds up to the big stuff, I think that is already happening”.

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Published in Current Affairs Survey, May 2015

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