Long way to go for Make in India

A look at “Make in India”, published as an oped in the Hindustan Times:

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How does one judge Make in India? Recent news that foreign direct investment (FDI) flowing to defence in 2016-17 was an absurd trickle of 61,000 (or perhaps $61,000, the Ministry of Defence didn’t specify) seems to have not caused much of a ripple. Nor has the fact that FDI in defence in the past three years has been – this isn’t a typo either – $174,000, notwithstanding several liberalisation announcements.

Defence is just one, albeit telling, sector, with its own peculiarities such as the much-delayed “strategic partners” policy and a single buyer – the Ministry of Defence. But it is an exaggerated version of the story playing out across the high-profile Make in India campaign, which promises to generate millions of jobs in India by increasing the share of manufacturing to 25% of gross domestic product (GDP).

India has seen strong FDI flows in the last couple of years, but most of this is going to ride-sharing services like Uber and Ola and e-commerce providers like Amazon and Flipkart. FDI in manufacturing hit a high of US$9.6 billion in 2014-15 (slightly better than the previous 2011-12 record), but actually fell the next year to US$8.4 billion. A major pickup in 2016-17 seems unlikely.

Despite rising costs in China, India has made little headway into becoming a global manufacturing alternative, particularly at the low end that generates the most jobs. Textiles and clothing jobs from China are moving to Myanmar, Cambodia and, yes, Bangladesh, while Vietnam, Thailand and Indonesia are gaining in electronics production. India has become a global small-car hub over the last couple of decades, but this relatively high-end segment is not a massive job-creator.

Things are slowly changing. India has a large domestic market to leverage, and the two dedicated freight rail corridors it is now building (connecting Delhi with Mumbai and Kolkata) should contribute to a major reduction in logistics costs in a few years. But, for now, southeast Asia is eating India’s lunch.

There are limits to what a government can do. India’s can’t, and arguably shouldn’t, try to emulate China’s labour suppression that kept manufacturing costs down, which Myanmar, for instance, could. This government isn’t even pushing the smaller measures forcefully enough. The focus on “ease of doing business” reforms is commendable, but only four of 31 states have implemented meaningful labour reform in the last three years. Even if the opposition doesn’t want to cooperate, the BJP could certainly prod its 12 other states to follow suit.

And let’s not forget the self-goals. Demonetisation might have contributed to the BJP’s political victory in Uttar Pradesh, but it has shredded the informal sector. Large companies in sectors from automobiles to consumer goods have laid off thousands of workers, as have their suppliers. Demonetisation may have delayed the goals of Make in India by months, if not years.

It’s not a bad thing for India’s aspirations to exceed its political grasp, but a trending social media hashtag won’t generate jobs. India has always done its bit of manufacturing, and the true test of Make in India lies in whether its GDP share meaningfully rises, not in photo-ops.

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Rank exaggeration

A look at India’s rapid rise in the World Economic Forum’s Global Competitiveness Index, first published as an oped in the Hindustan Times:

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It’s clear that the Modi government can’t get enough of comparative rankings and indicators. And this is understandable: despite a solid reform push and favourable (if controversial) official statistics, many feel that the economy is performing well short of its potential. The latest piece of bad news was that unemployment – the Modi government’s most pressing challenge – is at a five-year high.

It makes sense, then, that the government tom-tommed India’s climb from 55th to 39th place in the World Economic Forum’s Global Competitiveness Index 2016-17, after a comparable jump the previous year from 71st. So is this finally evidence that the government’s reforms are paying off?

Not quite. There’s an important qualification that much of the news reporting missed: 81 of the 112 variables that determine a country’s competitiveness score arise from a survey of corporate executives that asks respondents to rank items on a scale of 1 to 7. In other words, each country’s score is predominantly the aggregation of subjective corporate judgments. The correct interpretation of India’s ranking progression is that India’s competitiveness has greatly improved in the past two years in the opinion of many corporate executives. Corporate opinion is undoubtedly important, but it’s not the same as objective reality.

The increase in India’ ranking is also an artefact of how different countries stack up. India’s raw score went from 4.2 in 2014-15 to 4.5 in 2016-17, causing its ranking to jump from 71st to 39th place. This was in part because there were 36 middle-income countries clustered above it, converting a 0.3-point increase into a big rise up the ladder. With the same increase in absolute points, Israel went only from 27th to 24th and Iceland from 30th to 27th. That said, 0.3 points is nothing to sneeze at, only Albania, Iceland and Israel had an equivalent increase in their scores.

So what drove India’s rise, other than the artefacts analysed above? The categories that contributed the most were “institutions”, “innovation” and “infrastructure”. The institutions score includes perceptions of corruption and due process, and the BJP government – at least at the Centre – has been free of scandals. But recall that even the UPA was substantially free of such controversies in its initial years, and the big scams came home to roost in the second term.

The innovation score includes private sector R&D, research institutions and so on, and is likely driven by the explosion of startups in the technology and services arena. The infrastructure score is presumably being driven by activity in roads, rail and power, sectors in which corporate executives hold the ministers in high regard. Critics, including myself at the blog Chunauti.org, have pointed out that many of their claims are exaggerated, but the corporate consensus here appears positive.

There is no doubt that the government is trying to kickstart the Indian economy, be it with attempts to ease the business environment, speeding up the building of infrastructure or by loosening labour laws. But with results hard to come by in a difficult global environment, the government’s PR machinery is in overdrive, seeking signs of progress wherever they might be found, or even constructed. And it’s the media’s job to separate the wheat from the spin.