Monday, October 27, 2014

Make In India – A reality check and the road ahead

I used to feel that India has missed the bus in terms of realizing its potential in the manufacturing or industry sector. Prime Minister Narendra Modi’s call for Make in India has rekindled the hopes of realizing it. Is it possible? Yes, but it is not going to be easy. The road ahead is going to present lot of challenges and it is definitely not an overnight journey. 

Let me highlight some of the facts before I present the road ahead:
          India stands at a ranking of 134 (out of 189) in the ease of doing business ( The figure indicates various parameters on which the ease of doing business is measured.

  •          India began its economic reforms in 1991 where as China began in 1980.
  •          China is today an $8-trillion economy and India is close to becoming a $2-trillion economy.
  •          If we look at the sector wise contribution to GDP, India is doing pretty well in services sector (includes IT, tourism, retail, banking, finance) which contributes 53% to GDP and employs 27% of the work force.  Manufacturing or Industry (petroleum, pharmaceuticals, gems, jewelry, textile, mining, engineering industry) contributes 27%, employs 22% of total workforce. Agriculture contributes 14% but employs 51% of the total workforce as shown in the following graph.


  •          Following graph shows the contribution of the sectors to GDP's of India, China and USA.

In a developed country, generally service sector contributes more than the industry / manufacturing.  Developing countries are in the process of industrialization.

India is doing pretty well in services sector and will continue to do so; driven largely by the advantage we have in the Information Technology sector. India employs 51% of its work force in Agriculture which contributes 14% to GDP.  We need to employ more people in the manufacturing and service sector moving away from the agriculture sector. It does not mean neglecting the Agriculture sector. Agriculture sector need to be mechanized in such a way that the per-person productivity goes up exponentially ensuring food security to billion plus population.

The Make in India call predominantly focuses on making India a manufacturing hub where the Prime minister invited global companies to set up factories in India promising to improve ease of doing business.  

Manufacturing or Industry sector does not create millions of jobs proportionally in terms of the investment unlike a services sector.  Hence the sector needs huge investment which can happen only when global companies show interest to setup factories in India. According to Confederation of Indian Industry estimates, China enjoys a cost advantage of about 10% over Indian manufacturing.

Few recent developments with regard to China provide an opportunity to India:

  •   Under pressure from USA, China had to appreciate its currency which is eroding its export competitiveness.
  •  Wages in India’s organized manufacturing sector is $1.50 an hour unlike China’s which stands at $3 an hour which implies India has a competitive advantage in terms of labour costs.   

Sustained effort over the next 10 years can definitely make India a manufacturing hub. 

  •         Improve the ease of doing business. Present Government has kept the goal of attaining 50th rank from the present rank of 134 in the next two years. Time taken in registration of business from existing 27 days be reduced to only one day as in Canada and New Zealand is one of the targets. Decision making has to be rule based and not left to the discretion of the individual (Crony capitalism).
  •         Provide clarity on taxation issues, merger & acquisition process. The recent examples of Nokia shutting its plant in Chennai because of service tax issue; Vodafone retrospective tax issue definitely has a negative impact on the business sentiment.
  •         Focus on quality education and not just improving skills. Skills are transient and might become redundant with changes in technologies. Quality education will ensure that people will continuously learn new skills to meet the changing requirements of an economy.  A painter’s skill might become redundant with the advent of technology.
  •         Labour reforms are the need of the hour. Incentivize good performance rather than making it tenure based.   We have numerous examples of PSU in India who are struggling to stay afloat because of inflexible labour laws. BSNL is a prime example of this. A labour reform does not mean hire and fire. It is about adopting practices linked with growth of the contributing employee along with the growth of the organization.
  •         Increasing FDI by opening up various sectors on need basis.
Make in India is a long journey which makes it even more challenging in a globalised world.  Present government having a majority of its own must usher in economic reforms at a good pace. The initial signs are encouraging but can it be sustained is the big question.