GS-3, Indian Economy, Uncategorized

Five Years of Make in India

Make in India campaign was launched by the Prime Minister of India on September 25, 2014.

Objectives

  • To attract foreign investment for new industrialisation and develop the already existing industry base in India to surpass that of China.
  • Target of an increase in manufacturing sector growth to 12-14% per annum over the medium term.
  • To increase the share of manufacturing sector in the country’s Gross Domestic Product from 16% to 25% by 2022.
  • To create 100 million additional jobs by 2022.
  • To promote export-led growth.

Outcomes

  • Foreign direct investment (FDI) has increased from $16 billion in 2013-14 to $36 billion in 2015-16 but it has not increased further and is not contributing to Indian industrialisation.
  • FDIs in the manufacturing sector are becoming weaker than before. It has come down to $7 billion in 2017-18 as compared to $9.6 billion in 2014-15.
  • FDIs in the service sector is $23.5 billion, more than three times that of the manufacturing sector which shows Indian economy’s traditional strong points of having remarkably developed computer services.
  • India’s share in the global exports of manufactured products remains around 2% which is far less than 18% share of China.

Issues

  • Investment from Shell Companies: Large part of the Indian FDI is neither foreign nor direct but comes from Mauritius-based shell companies which are suspected to be investing black money from India only, which is routed via Mauritius.
  • Low Productivity: Productivity of Indian factories is low and workers have insufficient skills.
    • McKinsey report states that Indian workers in the manufacturing sector are, on average, almost four and five times less productive than their counterparts in Thailand and China.
  • Small Industrial Units: Size of the industrial units is small for attaining the desired economies of scale, investing in modern equipment and developing supply chains.

An economy of scale is achieved when increasing the scale of production decreases long-term average costs. In other words, the cost of production per unit decreases as a company produces more units. Reducing the cost per unit of production is the most significant advantage created by economies of scale.

  • Complicated Labour Laws: One of the major reasons behind small companies is the complicated labour regulations for plants with more than 100 employees.
    • Government approval is required under the Industrial Disputes Act of 1947 before laying off any employees and the Contract Labour Act of 1970 requires government and employee approval for simple changes in an employee’s job description or duties.
  • Infrastructure: Electricity costs are almost the same in India and China but power outages are much higher in India.
  • Transportation: Average speeds in China are about 100 km per hour, while in India, they are about 60 km per hour. Indian railways have saturated and Indian ports have been outperformed by a lot of Asian countries.
    • The 2016 World Bank’s Global Performance Index ranked India 35th among 160 countries. Singapore was ranked fifth, China 25th and Malaysia 32nd. The average ship turnaround time in Singapore was less than a day and in India, it was 2.04 days.
  • Red Tapism: Bureaucratic procedures and corruption make India less attractive for investors. India has made progress in the World Bank’s Ease of Doing Business (EDB) Index, but even then, is ranked 77 among 190 countries.
    • While the EDB rank has improved, the Make in India campaign has not succeeded in increasing the size of the manufacturing sector relative to domestic output.
    • India ranks 78 out of 180 countries in Transparency International’s Corruption Perception Index. To acquire land to build a plant is very difficult here. India has slipped 10 places in the latest annual Global Competitiveness Index compiled by Geneva-based World Economic Forum (WEF).
  • Insufficient Rules and Regulations: Labour reforms and land acquisition laws were not completed before making attempts to attract foreign investors to Make in India.
  • Capital Outflow: In future India will have to face another external challenge in the form of capital fleeing the country. The net outflow of capital has jumped as the rupee has dropped from 54 a dollar in 2013 to more than 70 a dollar in 2019 and the rising prices of oil add to it.

Steps Taken

  • Government has taken steps to revise the FDI norms to make India more attractive for FDI.
  • For export-oriented growth and to compete with Southeast Asian countries, especially in attracting FDIs, the reduction of the corporate tax from about 35 to about 25% is a significant move.
  • The US-China trade dispute has given the competition a new dimension. After the tariffs have been increased on Chinese exports to the US, companies might shift their plants from China to other Asian countries.
    • According to the Japanese financial firm Nomura’s report, only three of the 56 companies, that decided to relocate from China, moved to India. Foxconn is one of them which will be assembling iPhones in India.

Way forward

  • Liberalisation with its full growth and potential is the prerequisite if India intends to follow an export-oriented growth pattern.
  • Indian government has to take more initiatives to create a conducive environment for the growth of industries and especially manufacturing systems. A targeted approach towards specific goal can be used to address the issue.

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