Make In India: Economics & Political Economy

Introduction

       There is a general consensus that the Share of manufacturing in GDP is too low in India. This depends to some extent on the benchmark; it is certainly true when the benchmark is other fast growing economies of Asia.  Historically, across the World, the growth of the modern manufacturing sector has played a vital role in helping shift people out of low productivity traditional agriculture to high productivity urban jobs.  The share of the Indian labor force engaged in agriculture and/or dependent on it is too high.  The slow growth of modern labor intensive manufacturing is directly linked to, and an important reason why, the shift of labor from rural to urban areas has been so slow. When it comes to what should or should not be done to change this situations, however, there were many different viewpoints and contradictory policy prescriptions. The make in India campaign can help resolve these differences and create a reform program which all can support.

Development Economics

  The economic (economists’) discussion on this subject has been characterized largely by pre-1990s thinking.  This was the debate about import substitution versus export orientation.  Some of us involved with the choice of development path during the 1990s argued for an export neutral approach to trade, capital market, taxation and other policies. This approach was largely accepted and followed in the policy decisions made in the 1990s and 2000s.  The result was a new paradigm for corporate investment and growth: To invest at global scale to produce global quality goods and services and market globally. Given that a large part of the market for Indian companies was in India, a large per cent of the investment was also in India as was much of its funding.  But all these decisions were driven, by the needs of efficiency, productivity, demand and profitability in a largely neutral environment. This can and must remain the basic paradigm of the “Make in India” campaign.

Defense

  There is however, one exception to this neutrality paradigm: Defense production. Worldwide, strategic technology and production (including defense) is heavily controlled and constrained by confidentiality. The defense industry, even in the most free market economy, the USA, consists mostly of monopolies or duopolies heavily subsidized and controlled by the government. Import substitution and export thrust are therefore valid instruments for achieving the growth of the Private defense industry in India.

Political Economy 

The significant new element in the “Make in India” campaign (in my view) is to address the issues of Political Economy.  There is a joke among economists, that if you get 5 economists in a room and ask their opinion on an issue you will get six different views. Each will have a different view, contradicting all the others, and one of them is bound to change his own views during the course of the discussion (but not to the views of the other 4). In such an environment, where every member of the elite has a view, it is very important to first to get all on board to agree on the basic objective. Then take everyone’s suggestions to make a list of policy reforms and institutional actions that are vital to success.  Thus each will have to accept one or two policies that they do not agree with in return for the 4-5 that they think are vital to success.

Policy Reform

What are the policies that are vital to success of the “Make in India” campaign? One of the greatest obstacles to “making in India” is the jungle of laws, rules, bureaucratic controls and procedures.  As these are too many to enumerate in detail, they are very broadly captured under the banner, “Ease of Doing Business”.  Thus the campaign to improve the ease of doing can be seen as an umbrella that covers many diverse and different aspects of this problem. There are however two important sub categories that deserve special attention. An important instrument for achieving this objective is technology, encapsulated in the overlapping campaigns for “e-governance” and “Digital India”.

Tax Reform

   Firstly “Tax Terrorism,” the word boldly coined by the BJP manifesto.  The complex tax laws and rules and its bureaucratic systems need special attention and effort, because of the damage it has done to the economy in recent years.  This has happened despite decade long effort, starting in late 1980s, to simplify the tax system, both tax experts and tax payers remain highly dissatisfied with it. The fact that it could effortlessly cause so much damage to the economy is proof positive of the need for further reform of the entire tax system.

Labor Laws

      The second is the complex system of labor laws, rules, regulation, which has spawned an “inspector raj” that is simultaneously oppressive and dis-functional.   The result is a dualistic system with a missing middle: It consists at one end, of tiny-small low employment, low tech, low productivity firms, at the other end of highly skill and/or capital intensive, highly productive firms with very few jobs for the common man(integrated auto firms).  The firms with moderate skill, moderate capital requirement and medium to large employment potential are rare in Indian manufacturing & industry.  An important reason for the low share of manufacturing in Indian GDP is therefore the absence of these “mid-category” firms.  The oppressive system of labor controls ensures that small and tiny firms don’t adopt new technology and grow more productive, and new investment doesn’t flow into either medium technology & skills or labor-intensive manufacturing. 

Infrastructure & Skills

   Maximization of efficiency requires that domestic supply chains be able to access all parts of the country where natural or human resources reside. This requires connectivity and appropriate infrastructure. From one perspective, the only additional infrastructure required by the international supply chain is efficient ports. Even this helps domestic production through efficient supply of inputs into import competing products. Thus there is large overlap between the Indian infrastructure required for marketing of goods and services domestically or abroad.

Same is true of job skills. The entire range of skills needed for growth of manufacturing, is an essential element of “Make in India.”  Firm and product specific skills have however to be generated by the high end companies by and for themselves.  In addition, the skills that go into services, agriculture and construction also contribute to the competitiveness of manufacturing and thus to “Make in India.” They are also vital to create self-employment opportunities for the mass of rural youth.

Conclusion

  “Make in India” is both an economic and  political economy umbrella for creating a consensus for and making the vital policy and institutional reforms that can accelerate the growth of manufacturing and  higher quality jobs in this sector. It can also stimulate the creation of employment opportunities in services needed for manufacturing,  agriculture and construction. 

Post Script

   The ability of Private Indian companies to Make in India will be boosted by the signing of the, “Framework For The U.S. – India Defense Relationship,” 2015.  Para 6 B of this agreement outlines the objectives of the Senior Technology Security Group (STSG), “to develop understanding of export licensing and technology security processes and practices and to establish a technology security dialogue for adequate protection for advanced technologies.” Para 6C outlines the objective of the joint technical Group (JTG) to “discuss and co-ordinate defense research and production..” In practical terms, these groups will help Indian private (& public sector) firms get inside the moat of security that protects the latest US defense technology from foreign firms, while ensuring that the information does not leak to third countries. The work of these groups should make it easier for Indian firms to look for Joint Venture (FDI) Partners and collaborators, access the best US sources for high tech component, parts, sub-assemblies and assemblies and to sub-contract goods and services that can be more efficiently supplied from India.

A version of this article appeared in ET Blogs under the banner, "Policies Vital to success of Make in India campaign" at, http://blogs.economictimes.indiatimes.com/PolicyAnalysis/policies-vital-to-the-success-of-make-in-india-campaign/