Time to provide direction

Last Updated 03 August 2015, 17:37 IST

How can you achieve the dream ‘Make in India’? It has been a year since the current government gave a clarion call to this concept without adequately explaining to the people what does it imply. Many are still not very clear about what the concept intended to do.
If the sole idea is to make India a self-reliant, sustainable economic powerhouse first domestically, and later as a significant global power, then the essence of this whole idea gets misplaced. Because, in current form of globalisation of markets, it’s just one market which is global. Any firm or any economy will be internationally competitive only when it’s domestically competitive. One faces the competition of every kind here in its own domestic constituency.

So, the concept ‘Make in India’ could never rise to the occasion because of its shortsightedness. To give it a push to make it initially work still lacks serious understanding and dynamism.  All this explains that there is no clarity of thought and sequencing of policies. If India wants to be a sustainable global power, then it needs to rethink its economic model. Current model of emphasising and promoting services sector may not prove productive for long.

No one questions India’s enormous potential. But its true potential lies not in its services sector as in its manufacturing. Current statistics suggests that more than 75 per cent of production of goods and services in the country are produced by the private firms and corporate sector which belongs to manufacturing. Out of this, more than 95 per cent is produced by micro and small medium enterprises (M&SMES) in which 93 per cent are of informal workers.

So, in a way, Indian economy thrives on informal employment taking place within M&SMEs and the latter’s growth in manufacturing is directly related to growth of Indian economy. It’s therefore worth analysing the current state of the manufacturing sector which should form the backbone of ‘Make in India.’ Ours is a large labour-abundant economy with a rapidly growing workforce and its manufacturing sector is expected to continue as the prime driver of its economic growth. According to the 2015 Organisation for Economic Co-operation and Development (OECD) analysis, the manufacturing sector has contributed little to income growth and its share in total merchandise exports has been declining. Manufacturing has not brought much new employment, and most of the recent rise in manufacturing employment has been in the informal sector. The productivity in the manufacturing sector is low partly because M&SMEs find it hard to exploit economies of scale. Despite abundant, low-skilled and relatively cheap labour, the sector is surprisingly capital and skill intensive. Taxes and complex labour regulations inhibit firm growth. Land acquisition is slow, companies face frequent power shortages. Transport infrastructure, an important link in the chain is a great barrier. This is especially harmful as manufacturing is highly reliant on well-functioning infrastructure. Despite the effervescent innovation of the current government’s   administration, the policy legacy at the foundation of modern India still sits heavily upon policy delivery and outcomes. After two centuries of exploitative colonialism, India effectively locked itself out of global trade and investment flows altogether — just at the time when advanced countries were tearing down their mercantilist tariff walls to make way for the liberal, post-war economic order.

Effective implementation of forward and reform-oriented policies to make M&SMEs more productive and employment-oriented is not even statistically visible as initially mentioned in the OECD analysis. High population growth, of course, means that per capita GDP growth is much lower than overall GDP growth. High GDP growth is about large additions to the labour force in low productivity small enterprises, which dominate the profile of the manufacturing sector, despite some islands of global manufacturing scale.

India's labour productivity has been much lower than China's — and the gap is widening. In 2011, China had 8.8 per cent per capita GDP growth, while India's was 5.8 per cent. By 2014, China's per capita GDP growth had fallen to 6.7 per cent, but India's per capita GDP growth rate plummeted to 2.7 per cent. All this statistics suggest that India suffers from many serious problems.

Labour-intensive manufacturing
Prominent among them are labour-intensive manufacturing which continues to face daunting institutional and structural constraints. Large areas of agricultural sector continue to rely on rainwater which is sometimes elusive. Employment guarantee schemes may have shifted income to labourers without matching growth in productivity.

So, the Make in India initiative needs is to expand the scale and contribution of modern manufacturing but the focus should be on encouraging a large-scale movement of labour from low productivity agriculture and petty production to high productivity manufacturing. India’s employment protection legislation in the formal manufacturing sector remains among the most restrictive in the world. The share of manufacturing goods in exports is declining. And small and medium enterprises are mostly absent from Asia's dynamic vertically-integrated, production-sharing chains. Opening up the market to international competition is the priority. The change in strategic planning and direction is needed. India's participation in the Regional Comprehensive Economic Partnership negotiations is critical.
It’s time India seeks opportunities outside and relevance of such associations must be well-orchestrated with domestic requirement to make Make in India feasible. It’s important that India convinces its own folks in the USA to invest in large numbers back in their own country to promote business activity that in turn helps realise the dream ‘Make in India.’

(The writer is former senior faculty, Indian Institute of Foreign Trade, and  currently Professor, Lal Bahadur Shastri Institute Of Management, New Delhi)

(Published 03 August 2015, 17:37 IST)

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