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/
