How Modi Can Deliver on the Promise of ‘Make in India’

Despite Stalled Reforms, India Is an ‘Oasis of Opportunity’ in 2016

Within the 24 hours surrounding Indian Prime Minister Narendra Modi’s announcement of the government’s new, pro-manufacturing “Make in India” policy, the nation also boasted a successful mission to Mars and a credit rating that had been raised from “negative” to “stable” by Standard & Poor’s. Suddenly, a lot of things seemed to be going India’s way — but for “Make in India,” at least, there are plenty of hurdles ahead. 

The campaign, which focuses on the manufacturing sector, is not going to be easy to deliver, despite the enthusiasm that accompanied the launch of the effort’s new logo and website. FDI (foreign direct investment), Modi, told investors, should stand for First Develop India. “India is the only country in the world which offers the unique combination of democracy, demography, and demand,” he said. In the audience were CEOs from abroad — Maruti Suzuki’s Kenichi Ayukawa and Lockheed Martin’s Phil Shaw — and home, including Tata Group chief Cyrus Mistry, Reliance head Mukesh Ambani, Kumar Mangalam Birla of the Aditya Birla Group and IT tycoon Azim Premji.

Modi followed the launch with meetings with other CEOs, such as Mary Barra of General Motors, Jeff Bezos of Amazon, Mark Zuckerberg of Facebook, Satya Nadella of Microsoft and (earlier) Indra Nooyi of PepsiCo. They all gave the appropriate soundbites to the media. But the key question is: Will they bite? Will they be able to convince their boards and companies to invest in India? Will Make in India work?

“This is a great idea,” says Jagmohan Raju, professor of marketing at Wharton. “The Indian consumer has come of age, and domestic demand will continue to increase to justify the production of goods in India. Twitter  If goods are produced in India, it creates manufacturing sector jobs. It creates an infrastructure of ancillary industries. More jobs will be created in the industrial sector and the economy will get a boost. Japan started its growth path by making goods for the U.S. China has a strong manufacturing base. India can achieve the same.”

Getting Rid of Red Tape

“There are several hurdles to Modi’s Make in India campaign,” counters Ravi Aron, professor at Johns Hopkins Carey Business School. “The reason that there is very little manufacturing investment in India is not because the country has done a poor job of marketing itself. Twitter  India today is a bad choice for foreign investment in manufacturing. It is not surprising that manufacturing accounts for only about 15% of the Indian GDP.”

“Poor infrastructure, crony capitalism and corruption have likely done more to dissuade investment than labor laws.”Janice Bellace

Modi has not yet initiated many policy changes to improve the business climate in India, although he has assured investors that a red carpet will replace red tape. India is currently ranked 134th in the World Bank’s Ease of Doing Business list. According to government officials, as part of the Make in India initiative, all hurdles related to starting or doing business in India will now be resolved in a maximum of 72 hours. The government has created a panel of experts and representatives from various departments to hear issues related to domestic and global investment. To put that in perspective, Vodafone has been fighting the government in the courts for several years. Walmart is still waiting on the sidelines, having abandoned its partnership with the Bharti Group.

Almost a month after the new policy was announced, the government amended some of the labor laws. The changes pertain to the system of inspection of companies, known as the Inspector Raj. Under the new system, inspectors will no longer be able to visit companies of their choice and stay there for as long as they want. A computerized database system will decide who goes where. There is also a time limit for filing reports. An online Shram Suvidha portal has been unveiled for employers to submit one compliance report for 16 labor laws. “These facilities are what I call minimum government, maximum governance,” Modi said at the launch of the campaign. There were a few other measures, such as portability of provident funds, designed to benefit employees. But the Industrial Disputes Act, which does not allow a company to close down a loss-making unit, remains intact for now.

“Modi has taken the position that India must be transparent and efficient,” says Janice Bellace, professor of legal studies and business ethics at Wharton. “Poor infrastructure, crony capitalism and corruption have likely done more to dissuade investment than labor laws. What Modi needs to do is eliminate outdated legislation and replace them with up-to-date laws, where appropriate, and streamline compliance and enforcement procedures. Most importantly, Modi should commit the government of India to ‘decent work,’ an International Labor Organization term that includes opportunity, security, adequate remuneration and freedom of association.”

A Mindset Shift

Modi is trying to change mindsets — that of labor, of bureaucrats and of employers. “The policy offers few tangibles except acceptance of self-certified documents, a 72-hour window to get clarifications on the Make in India website and 25 defined focus areas,” says Radhicka Kapoor, fellow at the Indian Council for Research and International Economic Relations and the author of a recent paper titled, “Creating Jobs in India’s Organized Manufacturing Sector.”

“While the PM has acknowledged that India is indeed a difficult place to do business due to the large number of regulatory bottlenecks and has set a target of elevating India’s ranking by 85 rungs in the World Bank’s Doing Business survey, he has not outlined a specific strategy to achieve this goal,” Kapoor notes. “What the policy does, however, is to send signals of vigor and enthusiasm. But it will take a lot more than a flashy new website, a new lion symbol and catchy phrases to make India a manufacturing powerhouse and create productive jobs for India’s rapidly-expanding workforce.” 

Adds C.S. Rao, chief economist at apex chamber Assocham: “At this point, the policy mirrors Modi’s thoughts. It needs to be seen how it turns out.” According to Kumar Kandaswami, senior director at Deloitte Touche Tohmatsu India, so far the campaign is “a statement of intent.” That said, he adds, “it is a very important one as it will mobilize activity and direct the attention of stakeholders. The government has brought on board industry leaders. The fact that this is held out as an important initiative of the prime minister means that there will be serious follow-up action.”

No one is quarreling with the need to boost manufacturing, but Pankaj Chandra, professor of production and operations management at the Indian Institute of Management Bangalore, says that the government must take a proactive approach if it wants to get results. “In the past, the bureaucrats didn’t do their part of the job. They did not have the strategic framework,” Chandra notes. “There were the big manufacturing investment zones. But the bureaucrats couldn’t see beyond a real estate play. And manufacturing is everything but a real estate play. The world over, manufacturing has changed. Modern manufacturing is about science and technology, R&D, new processes, innovation, skills and quality. If we can’t do all this, I don’t think the Make in India project will work.”

“Make in India is a great idea. The Indian consumer has come of age, and domestic demand will continue to increase to justify the production of goods in India.”— Jagmohan Raju

But Babu Khan, senior director (manufacturing & infrastructure) at apex chamber the Confederation of Indian Industry (CII), says that “Make in India” is more than a statement of intent. “[Make in India] underscores a sound strategy and the strong reforms process that the new government is committed to,” Khan says. “The Indian economy is at a major turning point, as we can now look back at the global financial crisis and move ahead toward economic revival.”

Khan adds that recent statistics show how critical it is for India to focus on boosting manufacturing. “After growing at 10.1% during the five-year period 2005-2006 to 2009-2010, the manufacturing sector slowed down sharply, growing at just 4.2% in the past four years,” he explains. “As a result, its share in GDP has declined to 14.9% in 2013-2014 from a peak level of 16.2% in 2009-2010.”

Déjà Vu

This is not the first time that India has tried to boost its manufacturing prowess. In 2004, the Confederation of Indian Industry (CII) and McKinsey produced a report titled, “Made in India: The Next Big Manufacturing Export Story.” According to the report, “Manufacturing exports from India have not taken off even though India has several advantages, including engineering skills (process, product, quality and capital), a growing domestic market, a raw material base and a large pool of skilled labor.… India has the potential to increase manufacturing exports from $40 billion in 2002 to $300 billion by 2015.”

In 2004, the government set up the National Manufacturing Competitiveness Council (NMCC). In 2006, the NMCC came out with a national strategy for manufacturing. The objective: to raise the share of manufacturing in GDP from 17% to 30%-35% by 2015. The council dubbed 2006-2015 as the “decade of manufacturing in India.” In 2012, McKinsey wrote: “If India’s manufacturing sector realized its full potential, it could generate 25% to 30% of GDP by 2025.” In May 2011, the department of commerce finalized a strategic paper on doubling India’s exports from $246 billion to $500 billion in the next three years (2011-2012 to 2013-2014). Merchandise exports needed to grow at 26.7% to achieve this target. For the record, the manufacturing sector saw a decline of 1.4% in August 2014.

The figures have not changed materially; only the target year has moved from 2015 to 2025. A more recent FICCI report dated August 2013 notes: “In the current scenario, to expect manufacturing to grow at 14% (as targeted) on a long-term basis may not be feasible.” (Incidentally, Modi has appointed former McKinsey India chairman Adil Zainulbhai as chief of the Quality Council of India, which will spearhead the Make in India effort.)

Aron says that there are several things fundamentally wrong with India that will continue to stifle manufacturing. “There are four classes of deficits,” he explains. First are the factors of production. India faces crippling shortages in, for example, power. Businesses are forced to rely on expensive and inefficient ways of producing power. India’s labor laws make it hazardous for businesses that face seasonality in their demand to set up mass production facilities. By telling industry that it cannot retrench a part of the workforce in accordance with falls in demand, India has succeeded in making original equipment and component manufacturing extremely unattractive, Aron notes.

“The window for growth through export-led manufacturing may well have closed for India.”–Ravi Aron

Second, continues Aron, are the enablers of production — such as surface transport and ports. “Manufacturing requires a significant edifice of infrastructure support. This edifice is absent in India,” he points out.

“The third set of issues has to do with the legal regime. Laws are made to suit the extremely myopic and expedient objectives of the regime in power,” Aron notes. “The Vodafone retroactive taxation is a case in point. Even after the Supreme Court ruled that the company did not owe taxes, Parliament passed a retroactive law to claim the money from Vodafone in what must surely seem to foreign investors like state-sponsored larceny. Walmart, Amazon and Nokia are all faced with capricious tax and business laws being implemented by a corrupt bureaucracy. Is it any surprise that Microsoft did not include Nokia’s manufacturing facility in Chennai in its deal for Nokia’s phone and tablet assets. The reason? Tax terrorism again.”

Finally, there is chronic, all pervasive corruption. It is only the fourth deficit that Modi can tackle to some extent, says Aron.

Raju contends that Aron is too pessimistic. On infrastructure, for instance, “many manufacturing companies in India and elsewhere do create their own infrastructure. Look at Jamshedpur [a city with a population of more than 600,000 built by the Tatas over 100 years].” But he sees other problems. “I am less worried about labor laws, and more worried about the availability of a skilled workforce,” he says.

Kandaswami says the Make in India policy can bring in more FDI, make the sector more competitive, create good quality jobs and enhance the quality and quantum of exports. “But the vision statement has to be followed up by action on the policy and implementation fronts,” he explains. Not delivering on the promise would be a significant setback for manufacturing in India.

Has Time Run Out?

Considering that India realized the manufacturing imperatives several years ago and did nothing but produce a series of reports that gathered dust, it may already be too late. “The window for growth through export-led manufacturing may well have closed for India,” says Aron. There are two reasons for this, he adds. First are supply efficiencies: Large volume component manufacturers move to a region because they wish to co-locate with other firms in the same supply chain. “Between 1985 and 2000, many manufacturers went to China because of cheap labor,” Aron notes. “But their growth in the second phase — from 2000 through 2012-2013 — was because an ecosystem of suppliers comprising members … of many business verticals — semiconductors, medical equipment, heavy electrical, molded plastics and toys — had sprung up in China. In other words, many firms took their manufacturing to China because their supply chain partners were already there. Companies first went to China for cheap labor, but stayed for supply chain efficiencies.”

The second issue is the extent of automation in production, continues Aron. “In industry after industry, we have seen automation in the form of robotic production, digitization of business processes and precision manufacturing techniques,” he points out. “Manufacturing is returning to the U.S. much faster than manufacturing jobs are. The growth in manufacturing jobs is not really about where unskilled laborers swing their hammer at a widget moving on the assembly line; it is about workers that calibrate, operate and manage machines as a part of the manufacturing routine.

Even with all these challenges, Modi could still attract some manufacturing FDI to India, Aron says, though it would be nothing like China’s “spectacular gains” made between 2000 and 2010. “But nonetheless, [it could be a] significant amount,” he notes. “Before he does that though, he will need to build roads, ports and power plants — the manufacturing infrastructure. Perhaps a CEO could tell the PM: ‘If you build it, they will come.’”

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