Modi’s “Make in India” Faces Tough Challenges
By Pradeep Taneja

Modi’s “Make in India” Faces Tough Challenges

Sep. 30, 2016  |     |  0 comments

In May 2014, the people of India elected a new government led by the controversial but charismatic Narendra Modi. It was the first time in 30 years that a single party — the Bharatiya Janata Party or BJP — had won power on its own, giving the new government the mandate to govern without relying on an unwieldy coalition that had stymied progress on major economic reforms under the previous government.

One of the main reasons the BJP had risen to power with such gusto was due to its high-voltage campaign which was focused on the themes of development and governance, which resonated with an Indian electorate hungry for economic development, jobs, and higher living standards.

Modi, who comes from a provincial political background, had no direct experience of national level politics and had never been a member of parliament. But he built his candidacy for the prime minister’s position based on his experience as the leader (Chief Minister) of the western Indian state of Gujarat for more than a decade.

Gujarat had shown a new kind of dynamism rarely seen in South Asia. The state actively courted foreign investment, built modern road infrastructure, and offered not only a smooth passage through the labyrinthine bureaucracy for foreign investors but also a reliable supply of electricity, something most state governments could not guarantee at the time.

Despite Gujarat’s relatively poor performance on many social indicators, Modi had successfully cultivated the image of an Action Man — a leader who could get things done. He promoted the so-called Gujarat Model as an example of the kind of progress the rest of India could expect if he were elected prime minister.

This image helped Modi win legions of new fans and voters who catapulted him to the nation’s top office. Since becoming the prime minister of India, Modi has launched a series of new initiatives with catchy slogans. Each of these initiatives comes with its own implementation agency, advertising strategy, and celebrity endorsements.

If “Digital India” is designed to build cyber infrastructure, increase internet accessibility, and make government services available online, the “Skill India” campaign aims to train more than 400 million Indians in a range of technical, vocational, and professional skills by 2022. These skills would be needed if the most consequential of the new initiatives — the “Make in India” campaign — is to be successful.

Launched by Modi on September 25, 2014, the primary goal of “Make in India” is to make India a global manufacturing hub. Manufacturing currently occupies only a 16 percent share of India’s Gross Domestic Product (GDP) but the government hopes to raise it to 25 percent by 2025. This is indeed an ambitious target, especially at a time when the global economy is in doldrums and world trade is slowing.

But the Indian government is encouraged by the fact that India is now the world’s fastest growing major economy, described as a “true bright spot” in the global economy by the President of the World Bank, which expects the Indian economy to grow at a robust 7.6 percent in 2016 and 7.7 percent over the following two years.

In a significant boost to India’s growth prospects, after many years of debate and obstruction, the Indian political parties finally decided, in August this year, to put aside their differences and pass the legislation for the introduction of the Goods and Services Tax (GST) in parliament.

The GST will for the first time make India a common national market, removing multiple barriers to domestic commerce and simplifying the taxation system for manufacturers and service providers. This has been described by Indian and foreign business leaders as a landmark decision which could contribute up to 2 percent to India’s GDP growth and increase exports by more than 10 percent.

India is a latecomer to the export-led strategy of growth and may have already missed the boat.

India has also taken other steps to remove bottlenecks to future economic growth. It is investing heavily in new infrastructure, including highways, expressways, railways, ports, and airports. It is also tightening financial sector supervision and monitoring to ensure that its financial institutions are able to play their part in supporting a higher rate of economic growth. Similarly, it has developed a more coherent energy policy and is vigorously investing in new energy infrastructure.

While these are no mean achievements, the “Make in India” initiative still faces some daunting challenges.

One of the main challenges arises from the changing nature of manufacturing and innovations in industrial technology. India aims to attract both foreign and local investors to set up new manufacturing plants in India to create jobs for the millions of young Indians who enter the labor market each year. Modi said at the “Make in India” campaign launch: “Come make in India. Sell anywhere, [but] make in India,” thus appealing to foreign manufacturers to shift production to India to take advantage of the country’s abundant and low-cost labor.

Advances in production technology, however, mean that labor cost is declining in importance as a factor in investment decisions for high-end manufacturers. Modern manufacturing increasingly relies on automation and robots to achieve lower costs and higher quality. While a number of East Asian countries have invested heavily in robots, India is only beginning to explore the possibilities in this area. Its universities and research institutes are lagging far behind their counterparts in more developed Asian countries in the area of robotics.

It is therefore very likely that foreign manufacturers concerned about rising production costs in, say China, will relocate production to their home countries and use robots instead of moving their assembly lines to India for exporting to global markets. In fact, this is already happening in a number of industries. Although India will become an even more attractive market for foreign companies, they are more likely to produce in India mainly for the local market. This will limit the job-creating potential of foreign manufacturing companies in India, which is one of the main motivations behind the “Make in India” initiative.

Secondly, even if more foreign companies are attracted to India by the prospect of cheaper labor, the pluralistic nature of Indian public life means that low-technology manufacturing units will face stiff resistance from an Indian public already tired of poor air quality and degraded water supplies. India’s multitude of civil society organizations will waste no time in organizing protests against dirty and dangerous factories.

Moreover, the Modi government has already indicated that it wants “zero defect, zero effect” manufacturing, thus putting the emphasis on high quality manufacturing without any environmental consequences. But high quality manufacturers are less likely to choose India as their global production base because of India’s relatively weak linkages with regional and global supply chains.

Finally, India is a latecomer to the export-led strategy of growth and may have already missed the boat. When its East Asian neighbors were focusing on building their export-oriented economies, India was still following an import-substitution strategy. Now that India is ready to embrace global manufacturing, the tailwinds of global trade that carried East Asia to economic prosperity have turned into headwinds. The United States and Europe, which provided ready markets for Asian exporters for several decades, are now themselves facing difficult economic times and a shrinking middle class.

In spite of these difficulties, however, the overall outlook is still positive for India. It has a large population and a fast growing economy. It has always relied on domestic consumption to drive economic growth, which has maintained a fairly decent pace over the past two decades despite weak infrastructure and energy bottlenecks. As it upgrades infrastructure and improves the quality of governance, its army of private entrepreneurs will use their well-honed ability for improvisation and hunger for success to find new opportunities in a much more open domestic economic environment, even if global market conditions remain uncertain.

The “Make in India” initiative targets 25 sectors ranging from automobiles to information technology, where there is already a strong presence of private Indian companies, many of whom have a global footprint. In addition, new sectors have been opened up where earlier private Indian and foreign companies had negligible presence, e.g., defense production. The government has also allowed 100 percent foreign equity participation in potentially lucrative sectors such as railways, pharmaceuticals, and construction.

These policy changes will result in a healthier business environment for local and foreign enterprises to flourish. While “Make in India” may be a weak instrument for turning India into a global manufacturing hub, there is still plenty of room for India to grow and for its people and enterprises to benefit from it.

Leave a Reply

Your email address will not be published. Required fields are marked *