by Arnab Mitra
India has an ambitious goal to increase share of manufacturing from 15% – 25% of GDP. Can it be achieved? Arnab Mitra explores.
Prime Minister Narendra Modi’s Make in India initiative has got off to a good start. Foreign direct investment (FDI) inflows since September 2014, when India announced this programme, is up 31 per cent to $63 billion from $48 billion in the previous 15-month period, according to figures released by the Reserve Bank of India (RBI).
Various independent studies show that a large part of these inflows are coming to the following sectors:
Besides, significant further inflows are expected in sectors such as smart cities, defence, railways, infrastructure, electronics manufacturing, ports and inland water transport in the coming quarters as the government clarifies and clears policy and regulatory bottlenecks and several memoranda of understanding and other agreements signed by companies operating in these sectors translate into actual investments on the ground.
There remain significant challenges to the government’s goal of increasing the share of manufacturing in India’s GDP from 15 per cent at present to 25 per cent in order to create millions of new jobs for the 12-15 million youngsters who join the workforce every year.
A BCG study on Make in India says: “India is starting from far from a position that is far from advantageous. India’s manufacturing sector, with a 15 per cent share of GDP, compares poorly with peers like Thailand, Malaysia and Indonesia. India also suffers from such critical drawbacks like a lack of enabling infrastructure, poor perception of India in terms of ease of doing business, and a lack of proven ability to compete on a global scale. At the same time, India’s long-term prospects remain intact, with its core strength of human resource, a strong base of entrepreneurs and a robust and growing domestic demand.”
The same report goes on to point out the share of manufacturing has remained constant at 15 per cent of GDP over the last 20 years. This is also evident from the fact that in 1993, India’s share of global GDP and global manufacturing was 2 per cent and 0.9 per cent respectively. In 2013, the corresponding figures were 2.5 per cent and 1.2 per cent, respectively. But several of India’s peers, notably China, where manufacturing constitutes 32 per cent of GDP, Thailand (34 per cent), the Philippines (31 per cent) and Malaysia and Indonesia (24 per cent each) have succeeded in pushing this figure beyond 20 per cent. The resulting improvement in employment figures and GDP growth rates in these countries is there for all to see.
Further, there is empirical evidence from Japan, China, East Asia and the ASEAN to show that low tech manufacturing targeting global markets may be the best way to spur local manufacturing and create millions of jobs for farm labourers and unemployed youth.
But the precarious condition of the global economy and the gloom in the main consuming markets in the West mean this path may not be easy for India to follow.
Then, India suffers from some obvious disadvantages. These include underdeveloped infrastructure, continuing issues with the ease of doing business (despite some recent and ongoing improvements on this count), problems relating to land acquisition, legacy and some still unresolved tax issues, complex labour laws and red tape, especially at the level states and local bodies.
The early birds
The $16-billion Mumbai-Ahmedabad bullet train, the solar power projects undertaken by the Sun Edison, the Adani Group, Tata Power Solar and Azure Group, the pick-up in highway construction and the slew of proposals in e-commerce indicate that foreign and domestic investors are putting their money where their mouths are.
Several large Chinese mobile phone companies as well Foxconn, the world’s largest contract manufacturer, which makes the iconic Apple products, have lined up investments worth tens of billions of dollars in India. Softbank’s Mayaoshi Son, too, has committed more than $10 billion of investment in India. These are expected to materialise over the next couple of years.
The government is alive to the problems hobbling its flagship programme and is taking proactive steps to address these.
It has taken several steps to cut red tape and do away with needless regulations. It has eased norms for registration of companies, introduced self-certification in place of onerous certification procedures and launched a domestic ease of doing business index to spur competition among the states.
This has led to an improvement in India’s rank on the World Bank’s Ease of Doing Business Index from 142 to 134 out of 189 countries. The cut-off date for this ranking was May 2015. The subsequent steps taken by the government to further ease procedures are expected to lead to a further substantial improvement in India’s rank and this is likely to improve perceptions about doing business in India.
Then, the central and some progressive state governments have taken steps to ease complex labour laws and compliance procedures mentioned therein to create more jobs under the Make in India and other initiatives.
These include allowing women to work on night shifts, allowing shops and establishments to operate 24×7, bringing wages of contract workers at par with their full-time counterparts and making it easier for companies to close down non-viable units. Many of these reforms are being pushed through executive action as the government’s lack of majority in the Rajya Sabha has made it practically impossible to pass any legislation.
India has a large domestic market to address and government planners are hoping that they can negate the sluggish export market at least partially by stimulating domestic demand.
These measures seem to be paying off on the ground, even if the feel good factor is not yet evident.
Several leading human resource consultancies such as Teamlease, Manpower Group and Kelly’s have come out with reports saying the Make in India and Smart Cities initiatives are likely to create at least half a million direct jobs over the next five quarters. Since each direct job in manufacturing and infrastructure creates about four additional jobs in upstream and downstream sectors and in services, these can be expected to generate about 2.5 million additional jobs by the end of 2016-17.
The early reports indicate that Make in India is making a difference on the ground. This is expected to gather pace in the coming quarters. The inflexion point, though, is still some way off.
Once that point is reached, more jobs and a visible and tangible feel good factor can once again be expected to pervade the country.
Above Article was first published in India Inc.’s India Investment Journal