Accelerating Growth Through ‘Make in India’
“Prime Minister Modi’s speed of implementing policies and reforms is like ‘Shinkansaan’ (bullet train) and his reform agenda is as safe as Shinkansaan.” These are the words of Japanese Prime Minister Mr. Shinzo Abe, in praise of Mr. Narendra Modi’s ‘Make in India’ initiatives. This is the dream we all want to see in reality. Can’t we as a nation, for once forget our petty politics and other self-gratifications and rise up to the occasion and contribute towards making this dream a reality? After all, this is meant to be for the people of India, at large.
In order to revive an ailing manufacturing sector, Prime Minister Mr. Narendra Modi launched ‘Make in India’ initiative in September 2014 to encourage companies to increase manufacturing in India. The campaign aims at transforming India from a service-based economy to a balanced, employment generating, labour-intensive, growth-driven manufacturing economy. This includes not only attracting overseas companies but also encouraging domestic companies to increase production within the country. Thus making India an operationally viable low-cost manufacturing hub that generates over 10 million employment for Indian work force every year. ‘Make in India’ also aims at escalating the GDP and tax revenues in the country, by producing products that meet high quality standards, and minimising the impact on the environment –“Zero defect, zero effect”. Fostering innovation, protecting intellectual property, and enhancing skill development are the other aims of the program. This vision, while laudable, is not easy to achieve.
Let us understand where India’s manufacturing sector stands at present–nationally and internationally. Since the focus of the previous government had been on the service sector, India’s growth primarily led by this sector. Service sector has been contributing between 47 per cent and 56 per cent to India’s GDP, whereas manufacturing sector has consistently been the smallest contributor to India’s GDP, ranging between 13 per cent and 17 per cent. Internationally, till now India’s performance has been below par in this sector, especially over the last 5 years. India’s unique positioning in the global market has been a service-led economy in contrast to most other developing economies, including China. As per the world Bank data, India’s manufacturing sector contributes 17 per cent share of overall GDP, compared to its low-cost manufacturing peers—28 per cent of Thailand, 23 per cent of Malaysia, 21 per cent of Indonesia, 21 per cent of Philippines and as high as 36 per cent of China. Exports are the best indicator of success for any manufacturing nation. India’s share of global manufacturing stands at a little over 2 percent whereas China has in the meantime positioned itself as the workshop of the world, accounting for 22.4 per cent of global manufacturing.
‘Make in India’ is the need and opportunity of the hour especially for four major reasons. Firstly, the domestic and global demand for low-cost manufacturing. According to McKinsey’s analysis, the rising demand in India, together with the multinationals’ desire to diversify their production to include countries other than China, could together help India’s manufacturing sector to grow six-fold by 2025, to $1 trillion. Secondly,this is perhaps the last decade when we can exploit the full benefits of the demographic dividends. With sharp contrast of EU’s and Japan’s greying working force, India’s young population is poised to rise to 64 per cent of the country’s total population by 2020. Thirdly, manufacturing sector has a domino effect on all the other sectors in job creation. It not only has the potential for direct and indirect job creation but also can create a strong middle class—a must for any strong economy. Moreover unlike service sector, which employs only white collared professionals, the manufacturing sector can employ workforce with limited skill and education. The scale and nature of jobs that are needed for India can only be fulfilled by also emphasising on mid and low-end manufacturing. And fourthly, at present we have a rare instance where the government has a clear developmental mandate. In addition to these, at present, India is in the bright spot of the economic cycle, with a fall in major commodities prices (including crude oil), resultant low inflation, and reductions in the key interest rate by the RBI. Therefore, this is the right time to grab the opportunity by India’s manufacturers. In 17th century poet Robert Harrick’swords: “This same flower that smiles today, tomorrow will be dying.” Therefore India should seize this rare opportunity without any delay.
Given this environment, if India’s manufacturing sector realises its full potential, theoretically, it could generate 25 per cent to 30 per cent share of GDP by 2025. This can propel the country into the manufacturing big leagues, along with China, Germany, Japan, and the United States. Along the way, we also estimate that India could create 60 million to 90 million new manufacturing jobs and become an attractive investment destination for its own entrepreneurs and multinational companies.
To succeed in a manufacturing led transformation, India would need to undertake a well-planned and structured approach. India has certain core strengths in terms of manpower and raw materials (cotton, steel, coal, downstream petrochemicals etc.). Leveraging on these strengths certain sectors are more viable than the rest. They are: textiles and apparel, automobiles and its components, electronics, defence and aerospace, furniture and chemical and chemical products. India will also have to improve their productivity dramatically—in some cases, by up to five times current levels. Over and above, fixing the basic factors around infrastructure, the ease of doing business in this country and related government policies, there is a need to actively plan for and pursue long term goals of fostering technology and innovation. This ambitious target cannot be achieved, unless each of us come together and make it happen with a missionary zeal. In Swami Vivekananda’s words—“Arise, awake, stop not until your goal is achieved.” In this joint venture all the stakeholders have a role to play—the Government (Both central and state), the opposition parties, the industrialists, the professionals and even the common man. Everybody’s active constructive participation is of utmost importance to realise our shared dreams.
Under the ‘Make in India’ initiative, the Government has, in the last fifteen months announced several plans to improve the business environment. The broad policies under ‘Make in India’ initiative are: New initiatives, foreign direct investment, intellectual property facts and national manufacturing.
In order to overcome some of the major bottlenecks of India’s poor infrastructure, power and electricity, the government has planned and initiated certain projects, to develop freight corridors supported by better train linkages, to build a bullet train network (Diamond Quadrilateral Project), to modernise ports and airports (‘Sagar-Mala” Project). The government also initiated projects to build an optical-fibre network up to the village level and to ensure a basic level of infrastructure to all (home, electricity, water, toilet and access). Additionally, national highway construction program been initiated.
Ease of doing business in India is another major hurdle for any industry. The World Bank and IFC’s ‘Doing Business Report’, 2015, places India at the lowest ranks—142 out of 189 countries surveyed. This had been a clear portrayal of failure of earlier approaches of high government involvement. Mr. Modi’s ‘minimum government, maximum governance’ initiative has been introduced to rectify this. De-licensing and deregulation measures have been taken. Procurement of industrial licenses, environment clearances and unified returns submission have been made on-line. The tenure of industrial licenses has been extended. Self-certification and third party certification have been introduced in most cases. Major amount of components of defence products’ list been excluded from industrial licensing.
Vertical foreign direct investment (FDI) is particularly helpful to India’s manufacturing sector opposed to market- seeking, horizontal FDI. In case of vertical FDI, the production in the host country intended not just to serve the host economy but also global exports. Such FDI is more employment intensive and responds positively to quality of infrastructure and skill. The present government has eased FDI norms in 15 major sectors. In insurance, pension and most of defence sectors, FDI can go upto 49 per cent.In private sector banks up to 74 per cent and in township, specified railways project, certain plantations, medical devices FDI can go up to 100 per cent. Narendra Modi is spearheading the ‘Make in India’ campaign. It created buzz not only in India but throughout the world too and swayed the social media. This improved global awareness is certainly an impetus to FDI.
National manufacturing policy has given special thrust on employment intensive industries, capital goods industries, industries with strategic significance, industries where India enjoys competitive advantage, small and medium enterprises (SME) and public sector enterprises. In India, today, SME’s generate 50 per cent of the manufacturing output of the country. To encourage SME, the government has given further subsidies and exemptions.To nurture innovation, the smart cities have been planned in identified industrial corridors, having connectivity, institutions for specialised skill development etc. Work on five smart cities has already been started as part of Delhi-Mumbai industrial corridor project. The ‘National Investment and Manufacturing Zones’ (NIMZ) are being conceived as giant industrial green-field townships to promote world-class manufacturing activities. The central government in collaboration with state governments would develop these. For NIMZ, there will be single window clearance, relief from capital gain tax and various types of levies.
The skilled workforce in India is unfortunately extremely low and is estimated to be only 2 per cent of the total workforce, compared to countries like South Korea (96 per cent), Japan (80 per cent), Germany (75 per cent) and Britain (70 per cent). The present NDA government has realised the pressing need to scale up our skilling efforts in order to include its rural and semi-urban youth into the national development process. India’s first integrated ‘National Policy for Skill Development and Entrepreneurship’ has been approved by the parliament.This policy is conducive to a more holistic response to human resources planning and skill upgrading, by drawing together the various government agencies and providers of ‘education and training’. The government has set an ambitious target of skilling 500 million youth by 2022.
The Government has taken several initiatives to create conducive environment for the protection of intellectual property rights (IP) of innovators. By introducing efficient, transparent and user-friendly services, the government wants to establish a vibrant IP regime in the country. A technology acquisition and development fund has been proposed for the acquisition of appropriate technologies, the creation of a patent pool and the development of domestic manufacturing of equipment used for controlling pollution and reducing energy consumption.
According to World Bank, India with the score of 81 out of 100 in tax environment is more than twice the score of Malaysia, Thailand, Philippines, Turkey and China, the maximum score being equal to maximum risk. To build a stable, clear and transparent tax regime, legislative changes are required to rectify certain tax structures mainly—Indirect tax regime, retrospective tax. In addition to this, operational changes are necessary to improve tax administration and also special attention is required to strengthen the dispute resolution mechanism. The indirect tax system is currently mired in multi-layered taxes levied by the Centre and state governments at different stages of the supply chain – thereby generating cascading effect in increasing the tax liability. The proposed ‘Goods & Services Tax (GST)’ is a comprehensive indirect tax on goods (manufacturing) and services.The Government has laid the groundwork for implementation of a pan India GST by 2016, which will truly be a game changer and will reduce the overall burden of consumption taxes including excise, service tax and value added tax etc. Till now, the government has not been succeeded in getting parliamentary approval for GST bill. Retrospective tax also neededto be rectified to boost investor’s confidence. Retrospective tax though legal in India, creates undue uncertainty. In the recent visit to UK, Prime Minister Mr. Narendra Modi has said,“India will no longer resort to retrospective taxation, which is adversely affecting the mood of existing and potential investors.” To improve tax administration, a strong and secure information technology infrastructure has been initiated to make India’s tax administration effective and efficient. It will reduce the interface of taxpayers with I-T staff to bring down the possibility of corruption. The tax information network, TIN, which collates data on financial transactions, is functioning, and has made the government less dependent on information given by citizens in their tax returns. Lastly, in order to strengthen dispute resolution process, the ‘Central Board of Direct Taxes (CBDT)’ has rolled out a pilot project, whereby E-hearing of grievances would be conducted in 100 cases. Pilot projects would be conducted in Mumbai, Delhi, Bengaluru, Ahmedabad and Chennai for non-corporate cases.
Legislation regarding land acquisition is cumbersome and causing excessive delay, leading to crippling effect on infrastructure and industrial development. The revised ‘Land acquisition bill’ has not yet been approved by the parliament. Some urgent initiatives also need to be taken on labour reforms. Labour issues in India with highly restrictive laws needed to be improved. As a result, in India, today, only 16 per cent work force is regularised with remaining being temporary or on the rolls of the sub-scale SMEs. The NDA government is struggling to amend labour legislation but unable to do so due to opposition from unions and international conventions.
The opposition party should play a more mature and constructive role in the nation building. India with 1.3 billion people cannot allowed to be held to ransom by miniscule number of 179 Rajya Sabha MPs from the opposition party. And we are pretending to be proud of our democracy? Even media should play a more constructive role. Whether the best media or the worst media they are all speaking like ‘one’. Nobody is speaking about the country instead everyday they are harping on things that do not matter to the majority of the people of India.
In making ‘Make in India’ a success, states active participation is essential. The country’s central and state government can to gether help the manufacturing sector by dismantling barriers in markets for land, labour and infrastructure. Wherever the in states governments are proactive, efficient and supportive, the manufacturing sector is doing better. According to World Bank data, Gujarat is the number one state on ease of doing business followed by Andhra Pradesh and Jharkhand.
China has transformed itself and the world economy with it by drastically strengthening its manufacturing sector and increasing the export. In 1990 it produced less than 3 per cent of global manufacturing output by value; its share now is nearly a quarter. China’s emergence as a manufacturing powerhouse should be our role model. In seventh place, trailing Italy, as recently as 1980, China not only overtook the United States in 2011 to become the world’s largest producer of manufactured goods but also used its huge manufacturing engine to boost living standards by doubling the country’s GDP per capita over the last decade. That achievement took the industrialising United Kingdom 150 years.
But most importantly, the lion’s share of the improvement must come from India’s manufacturers themselves. India’s manufacturers have a golden chance to emerge from the shadow of the country’s service sector and capture more of the global market. India’s legacy of industrial protectionism has left many of the country’s manufacturers uncompetitive and in lacking of proven ability to compete at a global scale. To seize the opportunities now available to them, they must drastically increase the productivity of their labour and capital. The rewards could be significant: a McKinsey’s benchmarking study of 75 Indian manufacturers found that for an average company, the potential productivity improvements represented about seven points in additional returns on sale. Indian manufacturers lag behind their global peers in production planning, supply chain management, quality, and maintenance—areas that contribute to their lower productivity. As a result the workers in the India’s manufacturing sector are almost four and five times less productive than their counterparts in Thailand and China, respectively. India’s manufacturers should embrace global best practices—while tailoring them to India’s unique environment—to improve the efficiency and effectiveness of the country’s manufacturing sector, significantly. India’s manufacturer could learn even from its own IT sector’s experience in promoting the large-scale development of skills. India’s IT services and business-process-outsourcing sectors together hire nearly a million raw recruits every year and make them operational in just few months. As per BCG report, India has the second lowest manufacturing cost after Indonesia. Even though manufacturing wages has been more than doubled in both the countries over the last decade, these increases were offset by productivity gains and currency depreciation in India’s favour. In spite of that,India needs to maintain a sustained cost advantage. Cost advantage would entail keeping check on wages and other factor costs. The tougher still is to address competitiveness in non-cost factors. China, with its rising wages and increasing cost of production, is fast losing its cost advantage. There should be special emphasis on creating and strengthening SMEs. The small and medium size industries can play a big role in making the country take the next big leap in manufacturing. Widespread job creation can only happen if more and more entrepreneur comes forward to create small enterprises and in smaller towns. Lastly, India should be more focused towards novelty and innovation for these sectors, since it is a must for long-term growth and sustainability. Incidentally, though China leads the world in manufacturing at an overall level, US tops in technology intensive manufacturing. By virtue of its continuous efforts on innovation, US are re-emerging as global manufacturing leader. With its Shale gas invention the cost of natural gas has gone down to 25 per cent whereas for the rest of the world it doubled. With its advancement in advanced technology like—additive manufacturing, nanotechnology, artificial intelligence and robotics they would not only enjoy a commendable position at present but also in years to come. Such is the power of innovation.
India has been a thriving democracy and we have come a long way and the contribution of all the previous governments cannot be ignored. But in this government we see the result-orientation and the determination to achieve the result, which was generally absent in each of the successive government, till recently. A fairly satisfactory start has been made with the government announcing its intent and making a few yet important changes to improve the manufacturing sector. The implementation of these policies and projects will be really challenging.
As per CII-BCG report, India can expect an 8–10 per cent growth in manufacturing on a year-on-year basis as against ‘National Manufacturing Policy’ target of 15 per cent year-on-year. At this rate in 2022 manufacturing sector would command 17–18 per cent of GDP as against 25 per cent target. Even achievement of this would place India amongst the top 3–5 manufacturing economies globally. But how far we can achieve depends on how well all the stakeholders perform.The spring of hope should not turn into the winter of despair.
China has transformed itself– and the world economy with it by drastically strengthening its manufacturing sector and increasing their export. In 1990 it produced less than 3 per cent of global manufacturing output by value; its share now is nearly a quarter. China’s emergence as a manufacturing powerhouse should be our role model. In seventh place, trailing Italy, as recently as 1980, China not only overtook the United States in 2011 to become the world’s largest producer of manufactured goods but also used its huge manufacturing engine to boost living standards by doubling the country’s GDP per capita over the last decade. That achievement took the industrializing United Kingdom 150 years.
Being a born optimist, I hope pray that one day, our Indian lion would overthrow the Chinese dragon– in not so far future.
By Madhumanti SenGupta