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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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.

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.

Manufacturing a surprise

With all the flak that that the United Progressive Alliance (UPA) got for its “policy paralysis” and anti-growth policies (apparently both can simultaneously occur), one would hardly have expected a sharp economic revival in its final year in office. However, new and improved government economic data shows that in 2013-14 (i.e. the fiscal year ending March 2014), annual growth was a respectable 6.6%, up 1.7 percentage points from the previous year. This recovery is comparable in scale with the 1.9 percentage point growth spurt (to 8.6%) we saw in 2009-10 following the 2008 crash.

A tale of two base years (via Business Standard)
A tale of two base years (via Business Standard)

The chart shows that the biggest upward revisions (compared with the old data series that uses 2004-05 as base year) are in the areas of manufacturing and “trade, repair, hotels and restaurants”. For 2013-14, there is also a big upward revision in “mining and quarrying”. This is important: it tells us that despite what we have heard from lobbyists, industry associations and commentators, manufacturing performed reasonably well under the UPA. The mining industry, whose woes are only partly ascribable to UPA policy (other actors being the judiciary and state governments), also began a substantial recovery in 2013-14.

The share of manufacturing in the economy (under the gross value-added calculation) has also been revised from 13-15% under the old series (over the past three years) to 17-18% under the new series. This renders the government’s “Make in India” target of generating 25% of gross domestic product (GDP) from manufacturing by 2022 more achievable.

Are these revisions meaningful? R Jagannathan misses the point in attributing the growth jump mostly to the base effect created by a 2.2% reduction in the estimated size of the economy in 2011-12 (see table below). That did occur, but the 2012-13 estimate was also lowered by 1.3% while the 2013-14 estimate remained flat, none of which makes the growth numbers any less real.

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In fact, the new data are much more robust, particularly when it comes to the corporate sector. For instance, the old series relied on Reserve Bank of India data pertaining to about 2,500 companies, while the new one uses the MCA21 database at the Ministry of Corporate Affairs that covers 5 lakh firms. The obvious takeaway is that manufacturing continued to grow at a respectable pace despite the cramping effect of inflation, high interest rates and impaired balance sheets.

So do these numbers really vindicate the UPA (as ex-Finance Minister P Chidambaram has stated)?

There can be little question that the UPA went into policy paralysis between 2010, when serious allegations of corruption broke, and 2012 when it finally summoned up the will to raise fuel prices and permit FDI in retail. Most people would agree that it did some good things (such as institute a credible monetary policy under Reserve Bank Governor Raghuram Rajan, approve long-pending industrial projects and reduce fuel subsidies) but that its governance capacities were sapped by revelations of large-scale crony capitalism.

But as anger towards the UPA fades over time and its record is examined more dispassionately, the view that it seriously damaged India’s long-term growth prospects will ease into a more balanced critique.

Added on Feb 2

Morgan Stanley Research today issued a report that says that the new data showing a growth acceleration in 2013-14 are inconsistent with other indicators, such as the revenue growth of 0.9% clocked by 3,736 firms in the manufacturing and services sectors. This number, they say, has previously moved in sync with economic growth.

Let the games begin.