The Lion’s Meow: a closer look at Make in India

The logic behind the government’s Make in India initiative is clear. As Prime Minister Narendra Modi stated in his speech at the launch of “Make in India Week” in Mumbai on 13 Feb 2016:

We launched the Make in India campaign to create employment and self-employment opportunities for our youth. We are working aggressively towards making India a Global Manufacturing Hub. We want the share of manufacturing in our GDP to go up to 25 per cent in the near future.

The specific goal is to increase the share of manufacturing in India’s Gross Domestic Product to 25% by 2022, which is expected to generate approximately 100 million jobs for Indian workers (see Ab ki baar, cut-and-paste sarkar for Make in India’s similarities with the UPA’s 2011 National Manufacturing Policy).

So how are we doing so far? If you believe the headlines, pretty well. Responding to the lifting of foreign direct investment (FDI) caps in several sectors, efforts to improve the Ease of Doing Business and of course Prime Minister Modi’s frenetic wooing of investment in foreign travels, gross FDI flows to India jumped 27% to $45 billion in 2015-16, an all-time high. Even the Finance Ministry’s usually measured 2015-16 Economic Survey touted the FDI increase as a success for Make in India.  With our social media feeds full of stories about this or that investment, clearly the #MakeInIndia lion is roaring.

But the closer you get to the lion, the more the roar sounds like a meow.

Consider the most recent FDI data from the Reserve Bank of India (RBI), broken up by sector, since Make in India specifically concerns manufacturing. After an encouraging jump to a record $9.6 billion in 2014-15, FDI in manufacturing actually fell to $8.4 billion in 2015-16 (below the $9.3 billion it had reached in 2011-12).

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Note that these numbers cover inflows approved by the RBI and other agencies, and exclude share purchases, reinvested earnings and so on. This pattern is consistent with data from the Department of Industrial Policy and Promotion, analysed here.

Furthermore, the percentage of FDI flowing to manufacturing, which has been in the range of 35-40% for the past four years, dropped to 23% in 2015-16. Rather than manufacturing, services — think e-commerce providers like Amazon, Snapdeal and Flipkart, ride-sharing services like Uber and Ola — seem to be drawing a greater share of investment.

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What about the broader economy? After all, Make in India’s main objective is to raise the share of manufacturing in the economy as a means of generating jobs.

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Sadly, no meaningful change yet: the share of manufacturing has been flat for the past decade, with a slight downward trend (data here and here).

Here’s the rub: there is no doubt that building infrastructure, liberalising land and labour laws and improving the ease of doing business is difficult and time-consuming, and will take time to play out. But the Modi government needs to convince voters that change is happening, and fast.

Which is the genius of the Make in India campaign: it is essentially a branding exercise under which the government claims credit for pretty much everything and yet nothing. Every factory inaugurated, every defence deal signed, every shovel stuck into the ground will now be accompanied by the hashtag #MakeInIndia, even if the percentage of GDP arising from manufacturing stays exactly where it’s been for the past decade.

Consider this recent tweet from the official Make in India handle:

The Tejas is an Indian fighter plane that has been in development for more than two decades and first flew in 2001, but let’s label it #MakeInIndia. The BrahMos is a modified Russian cruise missile with Indian software that entered service with the Indian Navy in 2005, but, hey, why not #MakeInIndia.

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Fact checking Modi’s WSJ interview

Prime Minister Narendra Modi gave a wide-ranging interview to the Wall Street Journal to mark the second anniversary of his government. Modi argued that he had restored confidence to India and put an end to the “sense of policy paralysis, bad economic conditions and corruption” of 2012 and 2013.

As usual, there was a grain of truth, and also the exaggeration and sleight-of-hand that we have come to expect from him (look here for a check of other claims by Modi).

Consider Modi’s highlighting of the Pradhan Mantri Jan Dhan Yojana (PMJDY) as an instance of how his leadership had ended “a sense of negativity and a sense of deep inertia in the government machinery”:

If you see my Jan Dhan Yojana, you’ll find that I mobilized the whole government machinery so that in a definite period of time, the country’s poorest could be linked to the mainstream of the economy, its banking system.

Certainly, the PMJDY has accelerated the spread of basic savings bank deposit accounts (BSBDA), and increased their usefulness by adding overdraft facilities and life and accident insurance. But the truth is that the entire architecture of financial inclusion (BSBDAs, Aadhaar, electronic payments, RuPay cards) was created and implemented long before Modi took office. Modi often talks as if he singlehandedly brought the poor into the financial system, but the facts show that India’s financial inclusion programme was already established and growing rapidly.

In the two years before Modi, the UPA opened 44 and 61 million BSBDAs respectively, which under Modi jumped to 147 million in 2014-15 and 67 million in 2015-16 (see table below). If we conservatively assume that another government would have opened 61 million BSBDAs per year (as the UPA did in 2013-14), then the Modi effect looks something like this:

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Modi’s mobilisation of government machinery did have a positive effect: we can quantify it at around 92 million accounts, or 20% of the 457 million accounts opened (as on 30 March 2016). Impressive, yes, but the “policy paralysed” UPA also brought millions of poor households into the financial system. Indeed, there was a downside to Modi’s big 2014-15 push: the number of accounts with zero balance was 45% one year after PMJDY began, although it had declined to 26% by 26 May 2016. The growth in account openings consequently slowed in 2015-16.

If Modi did end “negativity” and “inertia” in the government, the PMJDY is definitely the wrong story to pick.

Modi went on to say:

My country had lost a lot of face on account of corruption relating to the coal scam, the scam involving auctions of the 2G network. But within a short and fixed time period, we have ensured transparency. Auctions are now actually held openly and online in front of media.

There is little doubt that the coal and 2G controversies damaged the UPA and helped Modi’s election victory. Indeed, the Modi government has overseen a spate of auctions to allocate natural resources since he took office. But this is not new: the UPA auctioned 3G and 4G spectrum in 2010, and 2G spectrum in 2012 after the Supreme Court cancelled the flawed January 2008 allocations in February 2012.

Likewise, the Modi government had to auction coal blocks after the Supreme Court (in September 2014) cancelled the allotment of 214 coal blocks made between 1993 and 2011. The Modi government could be commended for its speed, but it didn’t have any choice in the matter either.

What Modi deserves credit for is the passage of the 2015 Mines and Minerals (Development and Regulation) Amendment Bill that requires mining rights to bauxite, iron ore and other minerals to be auctioned. The UPA sat on a similar bill for six years before the Modi government succeeded in passing it.

In defence of his economic policymaking record, Modi also stated the following:

In India, reform in the insurance sector, reform in the defense sector, reform in the Bankruptcy Code had been pending for years…  In defense, in my country, there was no private investment. Today I have allowed it to 100%. In insurance, private investment was not allowed.  I have allowed it… I have allowed 100% foreign direct investment in the railways.

Now it’s entirely true that the Modi government succeeded in doing what the UPA had failed do for many years: to raise the FDI cap in insurance from 26% to 49%. It also passed a comprehensive Insolvency and Bankruptcy Code this year that should help clean up Indian banks’  balance sheets. And FDI is now permitted in railway infrastructure (though not in rail operations) whereas previously it was allowed only in metro rail.

But the claim regarding defence FDI is simply wrong. Consider the UPA’s July 2013 policy on FDI in defence:

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Here’s the Modi government’s current policy:

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The new policy is certainly more liberal than the older one, but it is misleading for Modi to say “today I have allowed it to 100%”. Just as it does today, the government had the power in July 2013 to approve defence investments with 100% FDI if it had wanted.

And the reality? No 100% FDI proposals have so far been approved. Here’s what Defence Minister Manohar Parrikar told parliament in April 2016: “From August 2014 to February 2016, a total amount of Rs.112.35 lakh (Rs 1.12 crore) has come into the country as FDI in the defence sector”. Damp squib.

Finally, Modi stated that:

If you look at the entire post-independence phase of the country, you will find that in terms of money volumes the maximum disinvestment has taken place in the last two years.

An odd formulation, considering that disinvestment began in 1991-92, but Modi is, at first cut, correct. The Rs 48,234 crore raised through disinvestment in 2014-16 is somewhat higher than the Rs 45,697 raised by the UPA in 2009-11.

But that’s too simple: if you’re comparing long periods like “the entire post-independence phase of the country”, you need to account for inflation: the value of a rupee raised in 2004-05 is not the same as in 2014-15. A proper comparison requires us to deflate the value raised from disinvestment with an appropriate, consistent index, in this case the Wholesale Price Index (base 2004-05).

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We find that the volume of disinvestment by the Modi government (in constant 2004-05 rupees) at Rs 26,671 crore is dwarfed by the Rs 33,464 crore the UPA2 raised in its first two years. Even in 2012-13, under the “policy-paralysed” UPA, the value of equity divested was greater than in either of the Modi government’s two years in office.

But the cold reality is that disinvestment has been an embarrassment under both the Singh and Modi governments, and basically reduced to a fiscal deficit padding sham in which a third to a half of funds have come from the state-owned Life Insurance Corporation. The following chart (sources here, here and here) says it all:

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It could be that the NITI Aayog or the Bank Board Bureau proposes a genuine transformation of the public sector in the coming months. But until that happens, Modi would be well advised to avoid flaunting what is a policy embarrassment from every perspective.

 

Arvind Panagariya spins an infrastructure tale

There’s something about serving in the Modi government that converts seemingly sensible people into inept spinmeisters. Consider the respected Columbia University economist and NITI Aayog Vice Chairman Arvind Panagariya. In an 8 May 2016 Business Standard op-ed titled The turnaround in infrastructure, he reeled off the Modi government’s many accomplishments in this arena. Following which he warned critics to “ponder the fate of infrastructure in the country had the previous administration continued.”

Except, if anybody bothers to look closer, Panagariya’s claims turn out to be irrelevant, misleading or simply false. In fact the “previous administration” equalled or exceeded many of the Modi government’s infrastructure achievements.

Consider highway construction. Panagariya points out that the government has unblocked Rs 3.5 lakh crore out of Rs 3.8 lakh crore worth of stuck road projects, and that “the construction (sic) of national highway projects awarded has risen from 3,500 kilometres in 2013-14 to 8,000 kilometres in 2014-15 and 10,000 kilometres in 2015-16.” So far so good.

But then he proudly adds:

“Road construction has risen from 8.5 kilometres a day during the last two years of the previous government to 11.9 kilometres in 2014-15 and 16.5 kilometres in 2015-16.”

A near doubling of the highway construction rate, pretty impressive right?

Not even close. Real data show that, in its last two years, the United Progressive Alliance (UPA) built 13.7 km/day of highways, compared with 14.3 km/day built in the first two years of the Modi government. That’s pretty much the same pace. In Panagariya’s defence, his fibs aren’t as blatant as Roads Minister Nitin Gadkari’s ravings (see Nitin Gadkari’s highway jumla), but they’re still way off.

As the chart below shows, there is no need to lie. The UPA did well, and in 2015-16 the Modi government did a bit better.

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Let’s look at railways next. Panagariya claims that:

In railways, the average rate of expansion of tracks has risen to 7 kilometres per day during 2015-16 from 4.3 kilometres per day during the previous six years. Investment in railways during 2015-16 has been double the average during the preceding five years.

An impressive increase, at least at first glance. But hold on. Panagariya is conflating track expansion with track commissioning. This detail is taken from Rail Minister Suresh Prabhu’s 25 Feb 2016 budget speech, in which Prabhu changed the measure of rail expansion from “completion” to “commissioning” because “nothing has started functioning until it has been commissioned”.

Fair enough. But, just out of curiosity, what does the old “track completion” metric, used for so many years, show?

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Say it ain’t so! What the Modi government claims to be a six-year track expansion high under this convenient new metric turns out to be a six-year low according to the now-discarded metric. Could the policy paralysed, rudderless UPA really have built tracks faster than the 56-inch Modi Sarkar? We’re still waiting to hear whether the government has hit its more ambitious 2,500 km target for 2015-16 (according to the old measure), but keep in mind that even this just about tops the UPA’s 2,300 km plus record in 2010-11 and 2011-12.

What about the claim that the Railways’ investment in 2015-16 was “double the average during the preceding five years”? A former Railways official points out in a 10 May 2016 Indian Express article that the Rs 94,000 crore railway investment figure for 2015-16 includes Rs 15,081 crore in funding for joint venture partners, a category not previously included. A like for like comparison shows the Railways’ investment to amount to Rs 70,000 crore in 2015-16, a record number but nowhere close to double the previous five-year average of Rs 48,000 crore. Busted.

(This propensity to spin isn’t new, as Manoj K noticed in Railway Ministry: 8 Achievements That Really Aren’t in July 2015.)

There are other claims in Panagariya’s op-ed, including some that may be true. Consider:

In domestic civil aviation, the total number of passengers carried has jumped from 66.4 million in 2014 to 80.8 million in 2015.

Great, but this had almost nothing to do with government policy.

In power, the government has already electrified 6,816 villages in the last two years compared with 5,189 villages in the three years before that. The prime minister has now announced his intention to bring electricity to the 12,000 villages or so that are yet to be electrified, by May 1, 2018.

A good effort, no doubt, but still modest once we look at a longer period. Turns out that rural electrification under the UPA in 2006-07, for instance, proceeded at four times the NDA’s rate. Cherrypick much?

Furthermore an investigation by The Hindu‘s Samarth Bansal shows even this 7,000 number to be exaggerated, and “that unelectrified villages have been counted as electrified”. To be fair the UPA’s numbers could be considered similarly suspect, but the fact is that the UPA vastly outperformed the Modi government in this arena.

One could go on, but it seems clear that Panagariya, like so many others in the Modi government, is guilty of cherry-picking or distorting data to make the government’s case. Not only is this futile, it obscures and even undermines the government’s genuine achievements. But in the interpretive dance that is the Modi Sarkar, facts don’t seem to count for much.

Nitin Gadkari’s highway jumla

Roads and Shipping Minister Nitin Gadkari likes to present himself as the singlehanded builder of Indian highways. He has repeatedly claimed — most recently at the 2016 India Today Conclave — that the pace of highway construction has increased by close to ten times under his watch:

This would be brag-worthy if it were true, but it isn’t. Check the table below:

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There has been an increase of 30% in the pace of highway construction between 2014-15 and 2015-16, from about 12 to just under 16 km/day. While that’s commendable, it is the same pace of highway building that the policy-paralysed United Progressive Alliance (UPA) achieved in 2012-13.

Mr Gadkari has a penchant — like others in his government — for exaggeration. Perhaps he should hold the boasts for when the pace of highway construction actually exceeds the (did I mention demotivated and paralysed?) UPA’s.

A tax too far

The Bharatiya Janata Party (BJP)’s minority status in the Rajya Sabha has proven to be a big impediment to its legislative goals, and the long-delayed Goods and Services Tax (GST) — which needs a 2/3rds majority in the Rajya Sabha to pass — seems as distant as ever.

In the Rajya Sabha elections held for 12 seats this week in Assam, Kerala, Nagaland, Punjab and Tripura, the Indian National Congress (INC) dipped from 66 to 63 seats (in the 245-seat upper house), while the BJP was flat at 48. The INC might drop another seat in the Rajya Sabha in the coming 4-5 months while the BJP could gain another three, but the ruling coalition is unlikely to make any meaningful gains in the upper house until 2018, close to the end of its term.

This is what the Rajya Sabha could look like by August:

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Clearly, the BJP will need the support of several uncommitted regional parties to pass bills through the upper house until at least 2018, and probably beyond.

And what of the GST? In a recent investor note, Morgan Stanley argued that:

The key to the bill’s passage is a reduction in the number of Upper House members opposing the bill. That number currently stands at 91 and it needs to fall to 82 for the bill to clear – we forecast that to happen by July 2016.

Not so fast.  It seems as if the Morgan Stanley analysts are treating the Janata Dal (United) as a GST supporter and placing the AIADMK — a vocal GST opponent — into the “opposing” column. But that’s overly optimistic: the JD(U) has a coalition in Bihar with the INC and is unlikely to vote for the GST bill. Neither are the two Left parties that control nine seats between them. And the Kerala, and Tam

The conclusion: this round of Rajya Sabha elections changes nothing for the BJP, it’ll still need INC support to pass the GST.

Sugar-coating urea

At a 21 Feb 2015 rally in Bargarh, Odisha, Prime Minister Narendra Modi accused an array of “unscrupulous forces” of trying to bring down his government. In the rogues’ gallery he included the owners of chemical factories who he said were angry at his government’s distribution of neem-coated urea, which had ended the profitable diversion of subsidised urea — meant for farmers — to their factories.

Compared with standard urea, neem-coated urea is said to improve productivity and reduce the diversion of subsidised fertiliser to those who can afford to pay market prices. It doesn’t make a meaningful dent in the country’s gigantic fertiliser subsidy bill (see below), but there are some savings.

So what’s the problem? As usual, Modi’s tendency to hog credit for initiatives that his predecessors have substantially contributed to. For once, Modi managed to acknowledge previous governments in his 15 August 2015 Independence Day speech, in which he identified urea pilferage as an issue. Modi admitted that neem-coating was “an idea propounded by scientists and this idea has not only been brought before my government, it has come before previous governments as well.” But he went on to imply that those governments had done little, and stated that “pilferage of urea cannot be stopped unless we go for cent per cent neem-coating of urea”. Modi has since taken “cent per cent” credit for the scheme (here and here).

So what are the facts?

One is that state-owned firms like National Fertilizers Limited have been making neem-coated urea for the past decade:

Another is that the UPA in 2011 raised the ceiling on neem-coated urea production from 20% to 35%, which led to sales of 63 lakh tonnes in 2013-14, about 28% of total urea production in the country. This represents genuine momentum.

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The figure for 2014-15 isn’t available yet, but neem-coated urea sales for National Fertilizers Limited and KRIBHCO were up 8% and 25% respectively, which appears to be in line with this trend.

The next big push came from the government’s 25 May 2015 decision to make all domestically-produced urea neem-coated, which should lead to a big jump in its output in 2015-16. A recent Department of Fertilizers presentation stated that 77% of domestic urea production already consists of neem-coated urea. If so, Modi should genuinely be able to take credit for a substantial jump in neemification.

That said, all this rhetoric about neem-coated urea distracts from the government’s failure to raise the highly subsidised price of urea, unchanged for six years at Rs 5,360/tonne — about a third of what it costs to make. The urea subsidy not only adds Rs 50,000 crore to the fiscal deficit but contributes to the rampant overuse of urea (neem-coated or otherwise), harming soil productivity and poisoning our food chain. If the “weak” UPA was able in February 2010 to decontrol non-urea fertilisers and increase the urea price (by an admittedly token 10%), what’s holding back Modi’s “strong” majority government?

Modi’s autopilot achievements

In a 13 Feb 2016 speech at the recent Make in India jamboree in Mumbai, Prime Minister Narendra Modi took credit for many economic achievements. These included India’s climb in various World Bank and UN indices, and all-time records in coal and vehicle production, software exports and cargo handling by ports.

The claims were taken from the BJP’s 31 Jan 2016 press release, which proclaimed that “it is necessary to show the statistics because in the Congress-led UPA-1 & UPA-2 regime, many of these indicators were moving in the opposite direction” and to counter “baseless propaganda and criticism”.

And this is what it had to say:

That’s quite a collection of achievements. The problem with claims of this nature is that there is a good chance — particularly in an economy that’s been among the world’s fastest-growing for a couple of decades — that each year will break some record or the other.

So how to judge? One way is to examine how commonplace these achievements actually are:

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Pretty common, it turns out.

The good news for the BJP is that only two of its 13 claims are outright false. But the fact remains that most of these economic achievements are so much the product of past momentum that the UPA, supposedly paralysed into inaction in its second iteration, could also have made 12 of the 13 claims, one more than the BJP. Even the short-lived United Front government in 1996-97 could have made at least four of these claims without batting an eyelid.

Political parties are entitled to seek credit wherever they can. But the current government’s obsession with topping lists and rankings produces empty claims such as these. Instead, Modi should spend more time listing what he sees as the main hurdles to faster growth, and what he did to fix them.

Ab ki baar, cut-and-paste sarkar: the case of Make in India

In his 25 Sep 2014 speech at the launch of Make in India, Prime Minister Narendra Modi described the initiative as a “lion’s step” towards promoting Indian manufacturing and generating millions of jobs. Amitabh Kant, who oversees the programme, stated in a subsequent interview that “Make in India is like a movement reflecting a new mindset of growth in India.”

The Congress Party begged to differ and ex-Prime Minister Manmohan Singh described Make in India as a “carbon copy” of the UPA’s manufacturing policy, but in the public perception Modi is the prime maker of Make in India.

Turns out Singh was right.

Okay, so the goals are identical, but surely the Modi government is bringing its own set of policy instruments to the challenge?

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Hmm. What about regulations? After all, Modi has proclaimed himself as the brusher aside of regulatory thickets.

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So the goals are the same, the policy instruments are identical and there is little difference in the approach to regulatory reform. But Singh is still being unfair describing Make in India as a carbon copy of the UPA’s National Manufacturing Policy: the Make in India document is better edited, tighter, uses more active voice.

Sure, Modi deserves credit for taking this manufacturing policy forward with his trademark salesmanship, and he may yet make a success of it. But it also undeniable that governments build on their predecessors’ work, something that Modi has so far lacked the grace to acknowledge. Whether it is road building, direct benefit transfers or financial inclusion, the Modi government has tried to hog credit, even when much of the groundwork and implementation had been done by the UPA. And it would seem that this is also the case with Make in India.

Ab ki baar, cut-and-paste sarkar.

Arun Jaitley, Pranab Mukherjee: Spot the difference

With the Modi government having completed a year in office, its economic record is the debate du jour. Turns out that the United Progressive Alliance’s (UPA) corruption and policy paralysis are now history and all would be well if only the economy would notice and jump to it (will happen by 2016… okay, by 2017 latest).

Now it might seem unfair to pile into Finance Minister Arun Jaitley, as foreign investors, taxpayers, Arun ShourieSmriti Irani and the RSS-leaning social media have, but here goes anyway. One criticism made of the government is that, save some important initiatives such as state labour law reform and commercial coal mining, it’s spent most of its time building on existing UPA initiatives (check here).

And it is Jaitley, rather than Narendra Modi, who is presently bearing the brunt of right-wing disenchantment. For instance, Firstpost Editor R Jagannathan wrote:

For a man who was brought in to reverse the economic follies of the UPA, Jaitley has instead chosen to make NDA a pale copy of UPA. His first budget was a flop, being a cut-and-paste job from his predecessor’s proposals; the second one was much better, focused and reformist, but he cannot deliver on it without more luck and sharper execution abilities than he has displayed so far.

If the second budget was “focused and reformist”, then so was Jaitley’s much-derided predecessor (and current President) Pranab Mukherjee. That’s because several key tenets of Jaitley’s 2015 budget share the same vision as Mukherjee’s 2012 budget, and the budget is really the most concrete instantiation of economic policy intent. The continuity is quite obvious from the chart below:

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These similarities illustrate the reality of economic policymaking in India: there is a broad consensus on its direction that goes beyond the particular party in power.