Just months after taking office in 2014, Indian Prime Minster Narendra Modi, standing below an immense logo of a lion, unveiled an economic vision for India to be a global manufacturing power. Investors should rush to “make in India,” he said.
Prime Minister Modi claimed that his strong leadership would usher in economic revival by increasing the share of manufacturing in the country’s gross domestic product (GDP) to 25% by 2025, and creating 100 million new jobs by 2022. He vowed India would train apprentices by the hundreds of millions to service that manufacturing boom, reduce bureaucracy and improve infrastructure, paving the way for foreign investors.
Three years into his five-year term, although parts of India’s $2.3 trillion-strong economy are in better shape today than they were earlier — deficits are lower; businesses face somewhat less red tape — the contribution of the manufacturing sector to GDP is barely 16%, progress in improving the country’s inadequate roads, rail lines and ports has been slow and the job creation rate has fallen. Between, 2014 and December 2016, only 641,000 jobs were created. That is far too few, considering roughly one million people join the labor force every month.
Official GDP statistics show first-quarter growth in the economy, at an annual rate, was just 6.1% — unimpressive for a big, poor country with much catching up to do. Last November, demonetization severely set back the manufacturing sector. In the automobile industry, sales dipped 19% in December, the biggest monthly fall in 16 years. Sales of FMCG products fell 40-50%. The informal sector, which comprises over 80% of the economy, was the worst hit. Hundreds of small units downed their shutters, leaving thousands jobless.
Also, the recent start of Goods and Service Tax (GST), supposed to create a single market, replacing lots of local taxes with national ones, was good to see, but the system, with six tax rates for different goods, is overly complicated and some in business complain it has been implemented poorly.
Almost nothing has gone as planned to attract investors to make in India.
“Initially, the Make In India program was mainly focused on defense production, but little has happened there. The local production of big ticket items eludes us. Even as he was announcing this, PM Modi ordered ready to fly Rafale jets in France,” says Mohan Guruswamy, chairman of Centre for Policy Alternatives Society.
According to a new data released by Stockholm International Peace Research Institute (SIPRI), India is the world’s largest importer of major arms, accounting for 13% of the global total sales between 2012 and 2016. Lockheed Martin Corp and Saab AB have promised to build products in India, but not much has progressed due to red tape, reliance on state-owned companies and constant delays. While a manufacturing unit for assault rifles, a joint venture between India and Israel, was launched this month in Madhya Pradesh, the Army rejected the indigenous guns built by the Rifle Factory Ishapore after they failed the firing tests last month. This leaves India overwhelmingly reliant on foreign imports, mainly from Russia, the U.S. and Israel.
Foreign investment inflow
Also, the pitch to encourage foreign companies to manufacture in India by liberalizing Foreign direct investment (FDI) policies has failed. Although the Department of Industrial Policy and Promotion reported that the gross FDI to India jumped to $55.5 billion in 2015-16, which is 23.1% more than what was received in 2014-15, but the data from the Reserve Bank of India shows that 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. 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.
A recent report by Institute for Studies in Industrial Development (ISID) revealed that FDI fell by nearly 30% during April-August period of 2016-17 fiscal year. “So far there are no clear indications as to whether Make in India has made a perceptible impact on the manufacturing sector. According to the revised index of industrial production, the manufacturing sector’s annual average growth rate after 2014-15 is less than 4%. In exports as well, the picture is not rosy. In 2016-17 manufactured exports, including petroleum increased 5% but this should be seen in the backdrop of a steep fall in oil prices in the previous year. The average annual growth rate during the last two years also remains negative,” says K.S. Chalapati Rao, co-author of the ISID report and a Distinguished Fellow at the ISID.
“The number of investment proposals increased in 2016, but it is yet to reach the peak of 2011 or the grossly reduced figure of 2013 in the pre-Make In India period. There cannot be an FDI policy without an industrial policy that works in tandem with trade and technology policies. Otherwise, industrial policy would merely amount to providing incentives and infrastructure and streamlining of procedures,” Rao adds.
Echoing the same sentiment, Guruswamy points out that “over 60% of FDI into India is of Indian origin. It’s by round-tripping. To me, when India starts looking good to Indians, FDI will start pouring in. We still have too many restrictive laws and policies that make acquisition of land, building, and bank finances problematic. Even our labor laws are inhibiting.”
Yet, because of its plentiful and inexpensive labor pool, global giants such as GE, Siemens, HTC, Toshiba and Foxconn have begun to show interest at manufacturing in India. But that doesn’t mean doing business in India is getting easier. India ranked 130 in the World Bank’s Doing Business survey this year.
“Nevertheless, the interest shown by Foxconn is a hopeful trend. The government should get more proactive in getting a few major businesses into India. A fighter jet factory will not generate much employment. Our focus should be on employment generation.”
With Input from Forbes