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Challenges For Make In India Campaign

Updated: September 3, 2015 7:15 am

‘Make in India’ is a major national programme designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best in class manufacturing and infrastructure sectors

Addressing a gathering consisting of top global CEOs at an event in Vigyan Bhawan in the capital on September 25, 2014, the Prime Minister said “FDI” should be understood as “First Develop India” along with “Foreign Direct Investment.” He urged investors not to look at India merely as a market, but instead see it as an opportunity. The Prime Minister said that it is important for the purchasing power of the common man to increase, as this would further boost demand, and hence spur development, in addition to benefiting investors. The faster people are pulled out of poverty and brought into the middle class, the more opportunity will there be for global business. PM Modi also added that the investors from abroad need to create jobs. Cost effective manufacturing and a handsome buyer—one who has purchasing power—are both required. More employment means more purchasing power, he asserted.

The ‘Make in India’ is major national programme designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best in class manufacturing infrastructure. Virtually everyone agrees that India’s manufacturing sector has tremendous potential for the growth. India has a large, young population (1.25 billion people, over 800 million of whom are aged 35 years or less) whose income levels are low (per-capita income stands at a modest $1,500 p.a.)—thus providing the industry with a large pool of inexpensive labour. However, manufacturing only accounts for a mere 15.1 per cent of GDP currently.

PM Modi has vowed to change that through the ambitious ‘Make in India’ initiative. As part of this initiative, he has promised to cut out red-rape holding back the industry, make legal compliance easier, introduce online-applications for notoriously opaque government clearances and amend restrictive laws. As part of this campaign twenty five important sectors have been highlighted which has the capability to become global leader in their respective fields. Some the sectors are automobiles, chemicals, information technology, pharmaceuticals, textiles, ports, aviation, leather, tourism and hospitality, wellness and railways. The ‘Make in India’ campaign has come at a very appropriate time. Many Multi-National companies are willing to invest in India and also have shown eagerness to set up their manufacturing units. PM Modi is also leaving no stone unturned in selling his pet project in his foreign trips.

The campaign, ‘Make in India’ is aimed at making India a manufacturing hub and economic transformation in India while eliminating the unnecessary laws and regulations, making bureaucratic processes easier and shorter, and make government more transparent, responsive and accountable. The government emphasized upon the framework which include the time-bound project clearances through a single online portal which will be further aided by the eight-member team dedicated to answering investor queries within 48 hours and addressing key issues including labour laws, skill development and infrastructure. This campaign basically gives hope to the unemployed to find a decent job if not big jobs as manufacturing leads to creation of lot of service sector activity. But India will have to make sure to focus on quality education rather than just skill development. It is also hoped that this is a precursor to change some labour laws that would make investing in manufacturing more attractive to Indians as well as other nations.

Problems and Prospects

There are certain legal and practical issues that have capability to hamper the smooth run of this campaign. There are some of the key concerns of the government which they got as UPA’s legacy when they dethroned the Congress-ruled government. These problems have the potential to wreck the initiative. Acquiring land for industrial projects has always been an ordeal in India. The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 (a pet project of the former UPA government) made land acquisition even more complex, time-consuming and expensive than it already was. For example, it requires the consent of 80 per cent of the affected land owners for private industry to acquire any land even for industrial projects that generate local employment. Further, the law mandates that a study known as a Social Impact Assessment (SIA) be conducted before the acquisition of single inch of land. Last but not the least, the law sets the price paid by the acquirer at 2-4 times the market rate (depending on the location). Industry experts now say that the time it takes to acquire land for industrial projects has gone up from 5 years to 8 years due to the provisions of the new law. In spite of all this, the risk of litigation remains, with higher courts often overruling the decisions of the lower courts and sometimes striking down the decisions of the governments. (On the contrary a report published in May 2014, that was sponsored by the Commerce and Industry Ministry has showcased that the model of land acquisition in Gujarat is the best practice, and one that may be emulated by other states after some modification, in order to improve the business environment.)

The second concern is associated with labour laws. India’s labour laws are excessively restrictive, employer-unfriendly and sometimes outright bizarre. There are at least 16 different central labour laws, some of which were framed as long ago as 1923. Since labour law is on the concurrent list, the Parliament as well as state legislatures can make laws, thus complicating matters further. Compliance is notoriously difficult and involves filing numerous reports at regular intervals and being at the mercy of government “inspections”. About 175,000 “inspections” are carried out annually, with companies complaining of harassment and extortion during these inspections. The laws also impose severe restrictions on the industry. For example, it is virtually impossible to “lay-off” workers in India thanks to The Industrial Disputes Act of 1947 that specifies that any company employing more than 100 people needs government permission before laying workers. A provision of the Apprentices Act of 1961 gives the government the power to arrest and imprison employers who don’t comply with certain technical provisions of the Act. Such laws have had the effect of killing industry, discouraging hiring and allowing government officials to harass and extort money from the industry.

The third major concern for Modi government is lack of investment in infrastructure. It will be hard to imagine a factory trying to produce goods without electricity, trying to transport raw materials or finished goods in the absence of good roads or exporting its products without adequate port linkages. The hard truth is that India has simply not invested in its infrastructure over the years. While countries like China have spent liberally on building power plants, highways, ports and high-speed rail networks, India has remained far behind. Apart from physical infrastructure, India sorely lacks electricity, with states like Telangana and Tamil Nadu reeling from chronic blackouts, colloquially known as “power-cuts”. India has had chronic power deficits, with 2014’s figure likely to stand at 5.1 per cent of demand. In addition to insufficient power generation capacity and lack of adequate fuel linkages to power plants, India’s state-run power distribution companies are in poor financial health, thus severely limiting their ability to buy power from power plants. To make matters even worse, India’s power transmission and distribution losses (T&D losses), standing at 23 per cent of the average generated power, are among the highest in the world. Therefore, until India creates the necessary public infrastructure, starting with simple things like electricity and coal, it is difficult to imagine manufacturing taking off in a big way.

The fourth and most important is granting environmental clearances to such projects. The Indian bureaucratic and political class is notoriously slow in granting clearances to projects. Every major industrial project requires a host of government clearances starting with an environmental clearance. While environmental clearances are supposed to take about 9 months, in reality, they take far, far longer. For example, POSCO’s flagship 52,000 crore steel and port project got its final environmental clearance after an 8-year-long, agonising wait. Even the government projects are not spared, with power projects and mining projects bearing the brunt of the delays. Slow decision making and delay in clearances drastically raise the overall cost of projects (interest on debt) and discourage investments.

But on the opposite if we critically analyse the steps taken by government, it is very positive and encouraging. PM Modi’s follow-up action on his promises to the industry has been encouraging so far—he has introduced online-applications for environmental clearances, raised FDI caps, increased the validity of industrial and shipping licenses, curtailed the powers of “inspectors” and taken up the reform of a few key labour laws. Yet, it is still early days for the government. PM Modi enjoys a large a majority in the Lok Sabha and has around 61 MPs (Including 3 of Shiv Sena) in Rajya Sabha. The passage of important bills should not be a major problem for the government. Even if these bills relating to labour and land laws are passed in the Parliament, it has to ratify by respective state governments (which includes a large number of non-NDA ruled states). The “Make in India” initiative is an ambitious project, which if executed out well, can transform the face of the Indian economy, create lakhs of jobs and put India on the path to prosperity. However, clearly it is a hard road ahead but PM Modi’s experience as CM of Gujarat for three term and his willingness to implement these projects looks positive for now. Make in India is a great idea. The Indian consumer has come of age, and domestic demand will continue to increase to justify the production of goods in India.

By Navendu Shekhar

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