In September 2014, Prime Minister Narendra Modi launched make in India scheme, intended to boost the domestic manufacturing sector and also augment investment into the country.
Governments also intended to encourage business from abroad into investing in the
country and also manufactured here, by improving the country’s “Ease of Doing Business’ index.
country and also manufactured here, by improving the country’s “Ease of Doing Business’ index.
Immediately after the launch, investment commitments worth crores were announced.The long term vision was to gradually develop India into a global manufacturing hub and boost employment opportunities in the country.
In 2015, India emerged as the top destination for foreign direct investment, surpassing the U.S and China. In line with the national program, states too launched their own initiatives.
Five years later, as we brace for another Union Budget, it would be appropriate to take stock of the much-hyped initiative as the economy in general, and the manufacturing sector, in particular, is on a slippery slope.
India has witnessed an increase in FDI from $16 billion in 2013-14 to $36 billion in 2015-16. But since 2016, the FDIs have plateaued that interns not contributing to India’s industrialization. The contribution FDI has been declining in the manufacturing sector as above $7 billion in 2017, as against $9.6 billion in 2014 – 15.
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The make in India ideas is not new. Factory production has a long history in the country. This initiative, however, set an ambitious goal of making India a global manufacturing hub.
To achieve this goal, targets were identified and policies outlines. The three major objectives were:
- To increase the manufacturing sector’s growth to 12-14% per annum in order to increase the sector’s share in the economy.
- To create 100 million additional manufacturing jobs in the economy by 2022.
- To ensure that the manufacturing sector’s contribution to GDP is increased to 25% by 2022 (revised to 2025) from the current 16%.
The policy approach was to create a conducive environment for investments, develop modern and efficient infrastructure, and open up a new sector for foreign capital.
Failures
First, it set out too ambitious growth rates for the manufacturing sector to achieve. An annual growth rate of 12-14% is well beyond the capacity of the industrial sector.
Historically India has not achieved it and to expect to build capabilities for such a quantum jump is perhaps an enormous overestimation of the implementation capacity of the government. Second, the initiative brought in too many sectors into its fold.
This led to a loss of policy focus. Further, it was seen as a policy devoid of any understanding of the comparative advantages of the domestic economy. Third, given the uncertainties of the global economy and ever-rising trade protectionism, the initiative was spectacularly ill-timed.
There are more several factors why Make in India did not makeup–
First No direct investment: there is no saying that a large number of FDI is neither foreign nor direct but comes from Mauritius-based shell companies.
Second – recycling of India black money, it is estimated by the Indian tax authorities that most of these investments were “black money” from India, which was routed via Mauritius.
Third – Low productivity of Indian Factories, as per the Mckinsey report, the Indian workers are less productive as compared to its counterparts like China and Thailand.
Fourth – insufficient skills, due to the lacunae of insufficient skills, Indian workers four to five timeless productive than their counterparts in Thailand and China.
The fifth – small size of Industrial Units, another reason is that the size of the industrial units is too small for attaining economies of scale, investing in modern equipment and developing supply chains.
Sixth – complicated labor regulation has made plants to quip themselves with only 100 employees.
Other factors
· There other factors for the slow growth of ‘Make in India Initiative’ that are mentioned in the below section:
· The infrastructure of the manufacturing industry is not good enough to compete with India’s counterpart.
· Power outages are much higher in India and the electricity cost is about the same in India and China.
· Inconvenient transportation is another reason for the slow growth of the initiative (transportation takes much more time in India)
· Bureaucratic procedures and corruption continue to make India less attractive to investors.
Regarding employment growth, we have witnessed questions being raised over the government’s delay in releasing data as well as its attempts to revise existing data collection mechanisms.
The crux of the debate has been that employment, especially industrial employment, has not grown to keep pace with the rate of new entries into the labor market.
With regard to output growth, we find that the monthly index of industrial production pertaining to manufacturing has registered double-digit growth rates only on two occasions during the period of April 2012 to November 2019.
In fact, data show that for a majority of the months, it was 3% or below and even negative for some months. Needless to say, negative growth implies a contraction of the sector. Thus, we are clearly waiting for growth to arrive.
Core problems of failure
‘Make in India’ have long gestation periods and lag effects, assessments of such initiatives can be premature. Also, the government often use the excuse of inheriting an economy riddled with macroeconomic problems and demand more time to set things right.
This is an argument that the current government invoked frequently. However, five years is a reasonable time period to assess the direction and magnitude of outcomes.
The last five years witnessed the slow growth of investment in the economy.
This is more so when we consider capital investments in the manufacturing sector. Gross fixed capital formation of the private sector, a measure of aggregate investment, declined to 28.6% of GDP in 2017-18 from 31.3% in 2013-14 (Economic Survey 2018-19).
Interestingly, though the public sector’s share remained more or less the same during this period, the private sector’s share declined from 24.2% to 21.5%. Part of this problem can be attributed to the decline in the savings rate in the economy.
Household savings have declined, while the private corporate sector’s savings have increased. Thus we find a scenario where the private sector’s savings have increased, but investments have decreased, despite policy measures to provide a good investment climate.
The Indian Rupee had a great fall
India has failed to create an international niche market as promised under the Make in India campaign. It has also lost its position as a destination for portfolio capital. As a result of a net outflow in recent times, the rupee has come under severe strain. Modi had promised to “bring the pride back” to the Indian rupee. Instead, the currency is now valued at its lowest ever in Indian history.
One could perhaps argue that the increased net outflow of capital from India has more to do with the increasing returns in the home countries where this capital had initially come from. So it is more a pull factor from the global North than a push factor from India that has resulted in this outflow. But then Modi’s promise was that the Indian economy would create pull factors of its own.
Make in India initiative an underprepared initiative
Accusing the previous governments of policy paralysis, the NDA government announced a slew of policies with catchy slogans.
This has resulted in an era of never-ending scheme announcements. Make in India is a good example of a continuous stream of ‘scheme’ announcement. The announcement had two major lacunae.
First the bulk of these schemes relied too much on foreign capital for investments and global markets for produce. This created an inbuilt uncertainty, as domestic production had to be planned according to demand and supply conditions elsewhere.
Second, policymakers neglected the third deficit in the economy, which is implementation. While economists worry mostly about the budget and fiscal deficit, policy implementers need to take into account the implications of implementation deficit in their decisions.
The result of such a policy oversight is evident in a large number of stalled projects in India. The spate of policy announcements without having the preparedness to implement them is policy casualness.
Conclusion
India needs to focus on competitive advantages on the global scale in the sector where we have a large domestic market.
India also needs to shift its priority on industries like Defence, electronics hardware, construction, health care, and agro-industries.
India must focus on creating a favorable policy environment for manufacturing and needs to foster skill development among the masses.
A cooperative partnership must be built between the government and the private sector, both domestic and foreign cases.
As the western world is concern about the technological parameter, India needs to leverage new technologies to resist its counterparts.
In order to make India as a global manufacturing hub, India should make administrative machinery effective as India always became stringent when it comes to regulatory clearances. A healthy business can be observed if India is able to create better procedural management and able to provide easier approval of projects.
India’s SME sector has the greatest potential and can play a big role in making the country take the next big leap in manufacturing. India also focused on making this sector viable to fulfil its dream. To provide a greater challenge to Chinese counterparts, India also needs to give impetus to the research and developments.
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