Impressive progress

MAKE IN INDIA : If the recent trends are any indication, one can be optimistic about 'Make in India' despite distractions by some fringe elements.

With a lot of fanfare, Prime Minister Narendra Modi launched the ‘Make in India’ campaign on September 25, 2014. After a year, it is time to have a look at the progress card. The projected goal is to increase the share of manufacturing from about 15 per cent of GDP to around 25 per cent over the next decade.

The corresponding share in China is 32 per cent. It is being recognised that without manufacturing jobs, India will not be able to absorb nearly 10 million young people joining the labour force. The so-called ‘demographic dividend’ would turn into a demographic nightmare.

Despite a great deal of scepticism in different quarters from the very beginning, things seem to be moving on the ground. Just look at some recent data and developments. According to an Ernst&Young Report, during the first six months of 2015, India  has been the country with the highest amount of committed inward FDI ($30 billion) in the world. Further, the rating of India as an investment destination by the investors surveyed is more than double that of China and six times that of Brazil. 

Taiwan based Foxconn, the world’s largest contract manufacturer of electronic goods, had most of its factories in mainland China. Now, they have decided to invest $5 billion to open a dozen new plants in India, employing some 50,000 workers. Lenovo, the Chinese giant in personal computer and smart phones, is going to start manufacturing smart phones under Lenovo and Motorola brands in its plant near Chennai.

Thus, the negative image created by the closing down of Nokia factory in Tamil Nadu (as a result of tax disputes) is giving way to a more positive picture. China’s Xiaomi has started to make smart phones for the Indian market in its factory in Andhra Pradesh and has already sold some three million phones. Hasbro, the Hong Kong based toy manufacturing giant, has decided to set up its latest toy factory in India.

The General Motors have announced plans to not only double the size of its  existing factory near Pune but even more significantly, to design and develop a new car model in India. Ford has set up a new car plant while Daimler has decided to make buses along with trucks in its assembly plant. The American defence firm Lockheed Martin’s factory near Hyderabad is already making component parts for its global production of the massive C130-J Hercules plane. 

An Italian firm (CNH Industrial) is building an agricultural harvester factory in Maharashtra. Amazon expects India to become its largest overseas market while reaching $10 billion mark in gross merchandise value in fastest time in its history – a testimony to the fast growing market of India. Investors are often guided by herd instinct. To that extent, such announcements by some of the global big names should attract more investment in the near future.

These promising developments are mainly due to  a slowdown  in growth  and saturation of domestic market in China (for consumer durables like smart phones and cars) coupled with steadily rising labour costs which serve to increase the relative attractiveness of India as an investment and production destination. India has now become the fastest growing big economy (and market) in the world. Unlike China, India still has a huge army of underemployed labour in agriculture which can be transferred to industry and service jobs at relatively low wages.

Thus, India can potentially become a manufacturing hub for many of the big global companies that can sell its products in the fast growing Indian market as well as using the country as a base for exporting to markets with similar tastes and purchasing power in other parts of the world.

Territorial disputes

China having territorial disputes with most of its neighbours (including two manufacturing powerhouses Japan and Taiwan) and flexing its military muscle in South China Sea have also helped India to project itself as a country with less political risk for foreign investors.  In addition, strategically coming closer to the USA and Japan has changed India’s image in the eyes of potential investors from USA and its allies, making them less wary to transfer technology.

Of course, having potential does not mean that it would be realised. The bad state of infrastructure (poor state of  roads, railways, ports, airports, power generation and distribution), the skill deficit of labour for working in modern automated factories, the obstacles in employing contract workers  and laying off in the face of fluctuating demand (specially export market demand), difficulties in land acquisition and securing environment, forest and other clearances from different layers of government, the slow-moving bureaucracy and judiciary, extortion by local political bosses and their goons etc continue to plague the scene. 

But even in these spheres, things are improving, at a faster rate in some states than others. The reforming states are bagging most of the new investments while the laggards are feeling the heat to improve the state of governance and infrastructure. If some states do not perform, people are voting with their feet by moving to states which offer better employment opportunities.

Successful experiments in changing land and labour legislations in some states would hopefully be followed by more states, eventually paving the way for consensus building and changes at the Centre. The likely introduction of GST within the next year or so would further simplify the tax regime and create a more unified Indian market.

If the recent trends are any indication, there are reasons to be optimistic about the Make in India initiative despite the distractions caused by some fringe elements. Though such divisive noises attract media attention, the hard-nosed investors guided by economic fundamentals are unlikely to be swayed by stray incidents.

(The writer is a former Professor of Economics, IIM-Calcutta)