SMEpost

Why ‘Make in India’ is so imperative to India’s Growth

SMEPost Bureau & Agencies

Make in India is an initiative of the Government of India. It was launched by the Indian Prime Minister, Narendra Modi on 25 September 2014. Under the ‘Make in India’ initiative, the government has, since its inception, announced several steps to improve the business environment by easing processes to do business in the country.

According to experts, it was a positive invitation to potential partners and investors around the world. Make in India, according to the supporters is much more than an inspiring slogan. It represents a comprehensive overhaul of processes and policies. It represents a complete change of the Government’s mindset – a shift from issuing authority to business partner, in keeping with Prime Minister Modi’s tenet of ‘Minimum Government, Maximum Governance’.

Purpose:

The purpose of the initaitive is:

With this objective, the initiative focuses on 25 sectors of the economy for job creation and skill enhancement. Some of these sectors are automobiles, chemicals, IT, pharmaceuticals, textiles, ports, aviation, leather, tourism and hospitality, wellness, railways, design manufacturing, renewable energy, mining, bio-technology, and electronics. The initiative hopes to increase GDP growth and tax revenue. It also aims at high quality standards and minimising the impact on the environment. It   hopes to attract capital and technological investment in India.

Need of the Program:
Contribution from the manufacturing sector to India’s Gross Domestic Product (GDP) has remained stagnated at around 16% for the past 25 years and there is an urgent need to enhance this contribution for the overall growth of the Indian economy.

Only the service industries’ contribution has grown to more than 50% and more at present. According to economists, India’s unique positioning in the global marketplace as a services-led economy is in contrast to most other developing economies, including China, which took the traditional route of labor-intensive manufacturing followed up by higher value added part-labour, part-capital intensive manufacturing.

According to experts, the services sector in India, employing skilled English-speaking workers – has had its share of glory, it cannot provide employment to the teeming masses. The scale and nature of employment that is required to employ people with limited skills and education can only be provided by mid and low-end manufacturing. The manufacturing sector had to be made vibrant to enhance the economy of the nation as it produced the most number of jobs. Hence, this initiative in the long run will fill up that gap. Thus a coordinated short and long-term action is needed to help boost Indian manufacturing competitiveness and stimulate the economy.

After India liberalized in 1991, the services sector was for long the fastest growing part of the economy, contributing significantly to GDP, economic growth, international trade and investment. Manufacturing contributes just 16 percent to India’s GDP, compared to a 56.5 percent contribution by services. According to the Reserve Bank of India (RBI), India’s ITeS/BPO exports rose 37 percent in 2012-13. While manufacturing exports continue to perform well, most of it remains in the skill-intensive sector (automotive, engineering, etc.). This does nothing for the large number of low-skilled workers who are either unemployed or laboring away in hazardous, inhumane conditions beyond the purview of established formal state regulations. Moreover, manufactured goods as a share of total Indian exports pales in comparison to the level in China.

The policymaking focus has now finally shifted to the manufacturing sector, with the government instituting a National Manufacturing Policy in 2011. The policy laid out plans to boost the manufacturing sector by raising its contribution to GDP to 25 percent and creating 100 million new jobs by 2025. Even today, India’s share of global manufacturing stands at little over 2 percent. China has meanwhile, over the years positioned itself as the workshop of the world, accounting for 22.4 percent of global manufacturing. For India to achieve its stated goals of reviving the manufacturing sector and providing jobs to the tens of millions of unemployed youth, it will need massive investment, including major contributions from foreign investors.

Make in India Key Highlights

Plan Process:

The Department of Industrial Policy & Promotion (DIPP), government of India worked with a group of highly specialised agencies to build brand new infrastructure, including a dedicated help desk and a mobile-first website that packed a wide array of information into a simple, menu. Designed primarily for mobile screens, the site’s architecture ensured that exhaustive levels of detail are neatly tucked away so as to not overwhelm the user. In addition, 25 sector brochures were also developed. Contents included key facts and figures, policies and initiatives and sector-specific contact details, all of which was made available in print and on site. It had to

(a) inspire confidence in India’s capabilities amongst potential partners abroad, the Indian business community and citizens at large;

(b) provide a framework for a vast amount of technical information on 25 industry sectors; and

(c) reach out to a vast local and global audience via social media and constantly keep them updated about opportunities, reforms, etc.

The Make in India program has been built on layers of collaborative effort. DIPP initiated this process by inviting participation from Union Ministers, Secretaries to the Government of India, state governments, industry leaders, and various knowledge partners. Next, a National Workshop on sector specific industries brought Secretaries to the Government of India and industry leaders together to debate and formulate an action plan for the next three years, aimed at raising the contribution of the manufacturing sector to 25% of the GDP by 2020. This plan was presented to the Prime Minister, Union Ministers, industry associations and industry leaders by the Secretaries to the Union Government and the Chief Secretary on behalf of state governments.

These exercises resulted in a road map for the single largest manufacturing initiative undertaken by a nation in recent history. They also demonstrated the transformational power of public-private partnership, and have become a hallmark of the Make in India program. This collaborative model has also been successfully extended to include India’s global partners, as evidenced by the recent in-depth interactions between India and the United States of America.

Progress

In a short space of time, the obsolete and obstructive frameworks of the past have been dismantled and replaced with a transparent and user-friendly system that is helping drive investment, foster innovation, develop skills, protect IP and build best-in-class manufacturing infrastructure. The most striking indicator of progress is the unprecedented opening up of key sectors – including Railways, Defence, Insurance and Medical Devices – to dramatically higher levels of Foreign Direct Investment.

A workshop titled “Make in India – Sectorial perspective & initiatives” was conducted on 29th December, 2014 under which an action plan for 1 year and 3 years was prepared to boost investments in 25 sectors.

The ministry has engaged with the World Bank group to identify areas of improvement in line with World Bank’s ‘doing business’ methodology. A 2 day workshop and several follow up meetings were held to formulate framework which could boost India’s ranking which is currently 142 in terms of Ease of doing business.

An 8 member team of investor facilitation cell (IFC) dedicated for the Make in India campaign was formed in September 2014 with an objective to assist investors in seeking regulatory approvals, hand-holding services through the pre-investment phase, execution and after-care support.

The Indian embassies and consulates have also been communicated to disseminate information on the potential for investment in the identified sectors. DIPP has set up a special management team to facilitate and fast track investment proposals from Japan, the team known as ‘Japan Plus’ has been operationalized w.e.f October 2014. Similarly ‘Korea Plus’, launched in June 2016, facilitates fast track investment proposals from Korea and offers holistic support to Korean companies wishing to enter the Indian market.

Various sectors have been opened up for investments like Defence, Railways, Space, etc. Also, the regulatory policies have been relaxed to facilitate investments and ease of doing business.

Six industrial corridors are being developed across various regions of the country. Industrial Cities will also come up along these corridors.
Today, India’s credibility is stronger than ever. There is visible momentum, energy and optimism. Make in India is opening investment doors. Multiple enterprises are adopting its mantra. The world’s largest democracy is well on its way to becoming the world’s most powerful economy.

Actions Completed

1. 14 government services delivered via eBiz, a single-window online portal 20 services have been integrated into the portal

2. Online portals for Employees State Insurance Corporation (ESIC) and Employees Provident Fund Organization (EPFO) for:

3. Department of Commerce, Government of India has launched Indian Trade Portal. Important feature of this portal is to be a single point for relevant information on measures other than tariff called the non-tariff measures like standards, technical regulations, conformity assessment procedures, sanitary and Phytosanitary measures which may affect trade adversely.

4. The Companies (Amendment) Act, 2015 has been passed to remove requirements of minimum paid-up capital and common seal for companies. It also simplifies a number of other associated regulatory requirements. It also simplifies a number of other regulatory requirements.

5. An Investor Facilitation Cell has been created in ‘Invest India’ to guide, assist and handhold investors during the entire life-cycle of the business.

6. The Department of Industrial Policy and Promotion has also set up Japan Plus and Korea Plus. They are special management teams to facilitate and fast track investment proposals from Japan and Korea respectively.

7. Protecting Minority Investors: Greater disclosure of conflicts of interest is now required by board members, increasing the remedies available in case of prejudicial related-party transactions. Additional safeguards have been put for shareholders of privately held companies

The Smart Cities Mission is progressing, with Special Purpose Vehicles for 19 cities already set up.

Delhi-Mumbai Industrial Corridor is a mega infra-structure project of USD 90 billion with financial and technical aids from Japan, covering an overall length of 1,483 Kms.

Manufacturing and the Economy: Theories and Trends
Industrialisation is the process of manufacturing consumer goods and capital goods and of building infrastructure in order to provide goods and services to both individuals and businesses. As such Industrialisation plays a major role in the economic development of underdeveloped countries like India with vast manpower and varied resources. Let us discuss, in detail, the role of industrialization in the economy.

Some of the key contributions of industrializations in an economy over long run are,

 

Thus the industrial development imparts to an economy dynamism in the form of rapid growth and a diversified economic structure which make it a progressive economy. The above mentioned benefits have been verified by many leading economists through their research. Let us see some of the key economic theories.

The balanced growth theory is an economic theory pioneered by the economist Ragnar Nurkse. The theory hypothesizes that the government of any underdeveloped country needs to make large investments in a number of industries simultaneously. This will enlarge the market size, increase productivity, and provide an incentive for the private sector to invest.

The dual-sector model is a model in developmental economics. It is commonly known as the Lewis model after its inventor W. Arthur Lewis. It explains the growth of a developing economy in terms of a labour transition between two sectors, the capitalist sector and the subsistence sector.

The manufacturing sector offers special opportunities for both embodied and disembodied technological progress (Cornwall). Technological advance is concentrated in the manufacturing sector and diffuses from there to other economic sectors such as the service sector.

As per capita income rises, the share of agricultural expenditure in total expenditure declines and the share of expenditure on manufactured goods increases (Engel’s law). Countries specialising in agricultural and primary production will not profit from expanding world markets for manufacturing goods.

A transfer of labour from low productivity agriculture to high productivity industry results in an immediate increase in overall productivity and income per capita. This transfer has been a major source of growth in developing countries. It is referred to as the structural change bonus (Positive static effect).

Economic development creates a mass market for industrial products. This creates dynamic opportunities for manufacturing. If a country remains in agriculture and fails to develop its domestic manufacturing industry, it will have to import increasing amounts of manufactured goods.

The “Big Push “ theory by Paul Rosenstein-Rodan emphasizes that underdeveloped countries require large amounts of investments to embark on the path of economic development from their present state of backwardness. This theory proposes that a ‘bit by bit’ investment program will not impact the process of growth as much as is required for developing countries. In fact, injections of small quantities of investments will merely lead to wastage of resources. According to Paul Rosenstein-Rodan, “There is a minimum level of resources that must be devoted to… a development programme if it is to have any chance of success. Rosenstein-Rodan argued that the entire industry which is intended to be created should be treated and planned as a massive entity (a firm or trust). He supports this argument by stating that the social marginal product of an investment is always different from its private marginal product, so when a group of industries are planned together according to their social marginal products, the rate of growth of the economy is greater than it would have otherwise been.

Similar opinion was expressed by economist W.W. Rostow when he discussed his “The Stages of Economic Growth”.

Manufacturing is an important activity to promote economic growth and development. Nations that export manufactured products tend to generate higher marginal GDP growth which supports higher incomes and marginal tax revenue. The field is an important source for engineering job opportunities. Among developed countries, it is an important source of well paying jobs for the middle class to facilitate greater social mobility for successive generations on the economy.

Industrial development is a driver of structural change which is key in the process of economic development. Research suggests that economic development requires structural change from low to high productivity activities and that the industrial sector is a key engine of growth in the development process.  In many cases of high, rapid, and sustained economic growth in modern economic development have been associated with industrialisation, particularly growth in manufacturing production.

Many economists agree that rapid manufacturing-led growth is what India needs and must seek to promote. Though the country has had rapid services-led growth for a decade or so, economists have tended to view this as not very stable.  Historically, manufacturing has led the growth process at early stages of development not just in today’s developed countries of Europe and North America but also in late-developers of Asia such as Japan, South Korea and Taiwan, and most recently in the People’s Republic of China. And no country in the world has achieved high-income status without developing manufacturing to a point where it accounts for a high share (around 30 per cent) of GDP.

The economic logic of this historically observed pattern of development is also well understood. On the supply side, manufacturing production is characterized by increasing returns to scale and rapid productivity growth. Manufacturing can also stimulate non-manufacturing activities significantly. On the demand side, the income elasticity of demand is higher for manufactures than for non-manufactures at relatively low levels of per capital income. And manufactures are eminently tradable, so that external demand can play an important role in supporting manufacturing growth.

The Prebisch-Singer hypothesis normally refers to the claim that the relative price of primary commodities in terms of manufactures shows a downward trend. Prebisch and Singer based this conclusion on a visual inspection of the net barter terms of trade – the relative price of exports to imports – of the United Kingdom from 1876 to 1947. Moreover, he argued that technical progress in manufacturing tended to be raw-material saving

Thus, there are powerful empirical and theoretical arguments in favour of industrialization especially manufacturing as the main engine of growth in economic development. The arguments can be summarised as follows:

There is an empirical correlation between the degree of industrialisation and per capita income in developing countries.

Productivity is higher in the industrial sector than in the agricultural sector. The transfer of resources from agriculture to manufacturing provides a structural change bonus.

Compared to agriculture, the manufacturing sector offers special opportunities for capital accumulation in developing countries. Capital accumulation can be more easily realised in spatially concentrated manufacturing than in spatially dispersed agriculture. This is one of the reasons why the emergence of manufacturing has been so important in growth and development. Capital intensity is high in mining, manufacturing, utilities and transport. It is much lower in agriculture and services. Capital accumulation is one of the aggregate sources of growth. Thus, an increasing share of manufacturing will contribute to aggregate growth. The manufacturing sector offers special opportunities for economies of scale, which are less available in agriculture or services.

Linkage and spill-over effects are stronger in manufacturing than in agriculture or mining. Linkage effects refer to the direct backward and forward linkages between different sectors. Linkage effects create positive externalities to investments in given sectors. Spill-over effects refer to the disembodied knowledge flows between sectors. Spill-over effects are a special case of externalities which to refer to externalities of investment in knowledge and technology. Linkage and spill-over effects are presumed to be stronger within manufacturing than within other sectors. Linkage and spill-over effects between manufacturing and other sectors such as services or agriculture are also very powerful.

The Case for Indian Manufacturing
According to experts, in the case of India, there also are two specific reasons why manufacturing-led growth must be the order of the day. The first is that economic growth cannot in fact be rapid if it is not manufacturing-led. The sustainability of services-led growth, therefore, required services exports to finance imports of manufactures to meet the shortfall in domestic production. This was quite impossible, and the inevitable balance of payment difficulties ultimately halted the growth process itself. Any attempt to revive services-led growth will fail for the same reason; severe balance of payments difficulties will re-emerge. It is manufacturing-led growth that can begin to restore the balance between domestic absorption and domestic production so that the external balance remains manageable. Thus, Manufacturing-led growth is essential. Any attempt to revive services-led growth would cause severe balance of payments difficulties to re-emerge

In non-agricultural urban India, where almost 70 percent of those employed fall beyond the “registered” manufacturing sector (i.e., the informal economy), there is an urgent need to not only formalize these professions but also encourage long-term, big ticket investments in large-scale manufacturing in order to provide meaningful employment to low-skilled workers. If India wants to avoid unemployment-spurred social mayhem, this is the approach to take.

The most urgent need is to upgrade India’s physical infrastructure to encourage domestic and foreign direct investment in the manufacturing sector. This will absorb the rural labor surplus that is migrating to the cities by providing employment in labor-intensive, less technology-intensive manufacturing, regulated by humane labor laws catering to the contemporary needs of the economy.

India’s manufacturers have a golden chance to emerge from the shadow of the country’s services sector and seize more of the global market. McKinsey analysis finds that rising demand in India, together with the multinationals’ desire to diversify their production to include low-cost plants in countries other than China could together help India’s manufacturing sector to grow by many fold by 2025, while creating up to million domestic jobs.

According to some experts, India’s manufacturers have long performed below their potential. Although the country’s manufacturing exports are growing (particularly in skill-intensive sectors such as auto components, engineered goods, generic pharmaceuticals, and small cars) its manufacturing sector generates just 16 percent of India’s GDP – much less than the 55 percent from services. Moreover, a majority of India’s largest manufacturers don’t return their cost of capital, a factor that dampens investment in the sector and makes it less attractive than its counterparts in competing economies, such as China and Thailand. Indeed, China’s manufacturers captured nearly 45 percent of the global growth in manufacturing exports from low-cost countries between 2001 and 2010, whereas India accounted for a paltry 5 percent.

Over the past many years, many of the country’s manufacturing jobs have disappeared, either due to increased productivity and automation or outsourcing overseas. Prior to the recession, the trade deficit peaked at around billion a year, with the deficit in manufactured goods accounting for the bulk of it. While the problems in America’s manufacturing sector are relatively easy to identify, as President Obama highlighted during his speech yesterday in Iowa, there is no one silver bullet that can instantly restore balance to America’s economy. Instead, coordinated long- and short-term action is needed to help boost American manufacturing competitiveness and stimulate our economy.

Also, as discussed earlier, India has a mass of surplus low-skilled labour that must be moved to productive employment in non-agriculture. This is the employment challenge, which must be met if economic growth is to be inclusive. Both historical experience and India’s own past experience suggest that only manufacturing is capable of absorbing this mass of low-skilled labour into productive employment.

According some reports, Services in India have been significantly less labour-intensive than manufacturing; in 2011-12, services accounted for 55 per cent of GDP but only 32 per cent of employment, while manufacturing accounted for 15 per cent of GDP and 13 per cent of employment. It is important to note the fact that organised manufacturing has been far more employment-intensive than organised services; in 2011-12, organised manufacturing accounted for 10 per cent of output and five per cent of total employment in the economy, while organised services accounted for 27 per cent of output and just nine per cent of employment. Moreover, organised services employed mainly high-skilled (those with above-higher-secondary education) labour, while organised manufacturing employed mainly low- and medium-skilled labour. In 2011-12, the share of high-skilled workers of all those employed was around 66 per cent in organised services and around 32 per cent in organised manufacturing.

High manufacturing growth still holds the best prospect for maximising both economic growth and growth of productive employment of low-skilled labour. High manufacturing growth, moreover, should be associated with high growth of construction and of certain services such as transportation and trade, which too are intensive in low-skilled labour.

For India to achieve its stated goals of reviving its manufacturing sector and providing jobs to the tens of millions of its unemployed youth, it must design policies targeted at low cost mass manufacturing, and will need massive investment, including major contributions from foreign investors. There are crucial lessons for India in China’s success in the manufacturing sector.

In this context it is important to note that the prime minister’s ‘Make in India’ campaign signals a key objective of the present government’s economic policy: promotion of rapid manufacturing-led growth. This means not just rapid growth of manufacturing, but also a lead role for manufacturing in India’s growth process. It does not call for discouragement or lowering of services growth; it calls for services growth to be pulled by manufacturing growth and not vice versa.

(The author is Prof. M. Guruprasad, UNIVERSAL BUSINESS SCHOOL)

Source: Indiainfoline.com