India in line for $225bn investment, 6mn new jobs

25-Feb-2016 #MakeInIndia Source: India Inc

The first-ever Make in India Week has come to a close with some impressive top line numbers – an investment commitment worth $225bn and the promise of nearly 6 million new jobs over the next five years. India Inc. goes behind these headline figures to dig a little deeper.

The just concluded Make in India Week in Mumbai has ended with investment commitments of Rs 15.2 lakh crore ($225 billion) in sectors as diverse as energy, manufacturing, real estate, telecom, textiles, auto & auto components, IT parks, tourism and social infrastructure that could, if implemented well and in full, create over 6 million jobs over the next four-five years.

Of these commitments, about a third has come from overseas companies. “We have already opened the economy across sectors to the world. We’re now showcasing, connecting and collaborating for manufacturing in the country,” said Amitabh Kant, Secretary, Department of Industrial Policy & Promotion, the nodal agency for the Make in India initiative that envisages increasing the share of manufacturing in India’s GDP from 16 per cent now to 25 per cent over the next decade and creating 100 million new jobs for the 12-15 million youngsters who join the work force every year.

Key numbers

By all accounts, the weeklong event was a success. Over 8,000 domestic and 2,500 overseas companies participated in the Make in India Week, which was inaugurated by Prime Minister Narendra Modi. The event drew delegations from 68 countries and business participation from 72.

Notable among the deals signed were the Vedanta Group agreement to set up a $10-billion LCD manufacturing plant in Maharashtra, Mahindra & Mahindra deal with BAE Systems to assemble the test the M777 howitzers in India and the announcements by Oracle to invest $400 million on nine incubation centres and JSW Jaigarh Ports decision to spend Rs 6,000 crore ($882mn) on new facilities.

Policy announcements

That apart, the government unveiled the National Capital Goods Policy during the Make in India Week. This policy envisages creating a globally competitive and business-friendly ecosystem for the capital goods sector in this country.

It also launched a Rs 2,200-crore ($350 million) Electronics Development Fund that will be used to finance research and development in the electronics manufacturing sector.

Reality check

The headline-grabbing numbers, while impressive, are just the beginning. Empirical evidence suggests that a vast majority of investment commitments do not translate into actual investments on the ground.

Perhaps with this reality in mind, Maharashtra Chief Minister Devendra Fadnavis, whose state attracted over the half the total commitments, said: “We’re setting up a sector-wise task force to translate the investments into implementation (sic). These investments have been thoroughly vetted to ensure they are realised and do no remain only on paper.”

The central government and other states are expected to aggressively follow up the investment commitments with investors to ensure that they actually lead to investments on the ground and jobs for the youth.

But an analysis on India’s investment climate released by rating agency CARE on February 5 makes for sobering reading. “… The picture obtained is that investment has not picked up significantly across the board and that higher levels of proposals and announcements have been concentrated in specific sectors. Industry is still pursuing a wait and watch approach given that its own performance has been subdued for the (first) three quarters of this financial year,” it says.

“Weak demand, low capacity utilisation and high leverage are impediments to reviving the private sector corporate investment cycle,” said D.K. Joshi, Chief Economist, Crisil, the country’s leading ratings agency and the Indian arm of global ratings agency Standard & Poor’s.

There are significant other hurdles the Narendra Modi government will have to surmount before its Make in India initiative can translate vision into reality.

Politics a major constraint

Competitive politics is the possibly biggest hurdle facing the Make in India initiative. The Congress, still smarting from its electoral demolition in the 2014 Lok Sabha elections, and other regional parties have tasted blood following the BJP’s defeat in the Delhi and Bihar assembly polls last year and the string of reverses it has suffered in local body elections in its strongholds of Gujarat, Rajasthan, Madhya Pradesh and Maharashtra.

They are unlikely to be very enthusiastic about a project that can potentially enable the Prime Minister deliver on his electoral promise of ushering in “acchhe din” (good times) and win back the goodwill of the electorate.

Significantly, Karnataka and Odisha, where the Congress and the BJD are in power, respectively, were the only Opposition-ruled states to participate in last week’s Make in India Week in Mumbai.

It must be said that the BJP governments at the Centre and in the states as well as BJP leaders in states where it is in the opposition haven’t exactly helped their own cause.

To begin with, the central government has allowed its lines of communications with the Congress to reach a breaking point. This was one of the causes of the policy paralysis during the last years of UPA II. But despite knowing that its lack of majority in the Rajya Sabha could severely hamper its legislative agenda unless it took all sections of the opposition, including the Congress, along, government managers did not do enough to mend fences with their rivals.

Making matters worse, intemperate statements blaming the first family of the Congress for holding up important legislations like the GST Bill, the real estate bill and the bankruptcy code have only led to a hardening of stance in the principal opposition party and resulted in two parliamentary sessions being washed out.

There is renewed hope that a series of outreach programmes by the Prime Minister, Vice President Hamid Ansari and Parliamentary Affairs Minister Venkaiah Naidu in the run-up to the Budget session beginning February 23 may yet bear fruit but with one day to go for the session there is still no clarity on the issue.

Then, political mismanagement and police high handedness in dealing with a student agitation in the premier Jawaharlal Nehru University (JNU) has only served to spread this unrest to other universities and a hardening of political positions across existing ideological fault lines.

“Since the start of the Make in India Week, I’ve received queries from more than a dozen clients on the political climate in India following the student unrest in JNU and elsewhere (which has received wide coverage in the western media),” said the director of a Big 4 consultancy who advises several European and US multinationals. “All of them wanted to know if the social situation in India would remain conducive to investment.”

Where is the money?

India needs at least $1 trillion in investments over the next decade to bring its infrastructure up to globally accepted standards. A large portion of this humungous sum will have to come from foreign investors and from the banking sector.

Unless the government can quickly put a lid on the spreading but, thankfully, still sporadic social unrest over a variety of issues ranging from student agitations, the politics over beef and the demand for reservations by traditionally affluent castes like the Patels of Gujarat, the Jats of Haryana and the Kapus of Andhra Pradesh, foreign investors who have committed investments or are considering them, may have second thoughts about actually spending money on the ground.

And India will not be able to achieve its ambition of becoming the world’s factory, a la China, till it can drag its infrastructure up to standards that foreign companies are used to in their home countries and in South East and East Asia.

In this context, Roads & Highways Minister Nitin Gadkari and Power Minister Piyush Goyal have done a wonderful job getting their crucial departments back on track but a lot more remains to be done in other parts of the infrastructure value chain.

Ease of doing business

Then, India’s rank on the World Bank’s Ease of Doing Business is still low at 130, despite an improvement of 12 positions. This is expected to improve further when this year’s rankings are released, but the Prime Minister’s goal of taking India into the league of the top 50 countries on this index is unlikely to come to fruition in the absence of significant labour reforms, the enactment of the bankruptcy code and the passage of the GST Bill and the land acquisition legislation.

Opposition from trade unions

Although states such as Rajasthan and Madhya Pradesh have taken steps to reform labour laws in their states, stiff opposition from trade unions is holding up pan-India reforms on this count. With no breakthrough likely anytime soon, how much of the multi-billion dollar investment actually translates into spends on the ground remains to be seen.

That apart, the success of the Skill India Mission, the government’s efforts at drought proofing the country with increased allocations for irrigation and other rural infrastructure and the efficacy of its programme to clean up NPA mess in the banking sector will hold the keys to the success of the Make in India initiative.

The silver lining

The road ahead is not easy but it is encouraging to note that the government is taking proactive steps to address many of them.

Finance Minister Arun Jaitley has indicated that his forthcoming Budget on February 29 will address the rural distress. This could be in the form of higher allocations for irrigation facilities and other rural infrastructure, a broadening of the right to food and a rise in the outlay for the Mahatma Gandhi National Rural Employment Generation Scheme.

Then, he has also said the government is on the same page as Reserve Bank of India Governor Raghuram Rajan on cleaning up the balance sheets of banks.

Analysts have interpreted this to mean higher allocations for bank recapitalisation and other measures to deal with the NPA problem.

This will be critical as banks have to play a major role in lifting the investment rate from 29 per cent at present to 35 per cent and higher.

Then, he also has to find funds to keep up public investments in infrastructure to keep the investment cycle running till private investments pick up.

These won’t be easy and Jaitley will have to find some way of pulling multiple rabbits out of his hat.

“But the government has to get its political management and social messaging acts together first. Then, it needs to have a single-minded focus on implementing all its ambitious schemes. It won’t be a cakewalk. But it’s not an impossible task,” said the CEO of a leading Indian AMC, pointing out that China and before it, the South East Asian tigers and even earlier, Japan had all traversed this path successfully.

And that gives hope that India, too, might succeed.

India in line for 225bn investment 6mn new jobs

by Arnab Mitra

Arnab Mitra is Consulting Editor, India Inc. He writes on business and politics.

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