Make in India’ Promises for an Industrial Revolution

At the height of recession following Lehman crisis, the developed countries embarked on protectionist policies – the United States flouted a “Buy American” campaign – to lift their economy from the slumber. Though structurally different, India too has been passing through one of its worst economic phases but Prime Minister Narendra Modi has a different policy altogether for coping the challenges.

Modinomics, as it is being coined for Modi’s common sense based policies, has been making waves world over with the “Make in India” offer. It has all the ingradients for ushering in an industrial revolution. In fact, the new initiative should herald in Globalisation 2.0, which has to be far more effective than the first round of early 1990s. While the flagship scheme is welcome, the government must ensure that the benefits of rapid industrialisation percolate to all and does not lead to a jobless growth.

The response so far has been encouraging. Already, Japan has committed $35 billion, China promised $10 billion and many others such as the United States will follow suit. With steep rise in wages and abetting demand in China, it is perhaps the right time for India to replace the Asian super-power to become the world’s new “factory”. There is no doubt that the strategy to make India a manufacturing hub will have a snowballing effect on the economy – it will help attract large doses of foreign investment, reduce imports, narrow the trade deficit and accelerate growth. The question is whether it will actually be inclusive? Will it address the problems of unemployment and help reduce poverty?

The “Make in India” strategy has to be a blend of policy mix that not only encourages large-scale manufacturing but takes along the Small and Medium Enterprises (SMEs) to make the growth process more inclusive. What’s the use of rapid industrialisation if it does not benefit those at the bottom of the pyramid? Here, SMEs come into the picture as it is this sector that can help India cut its reliance on imports, spur jobs and raise income of millions.

Which is why, the “Make in India” mission has to be supported by a host of changes in the government policies and procedures ranging from the FDI rules, taxation, SME policy to labour laws.

The main features of “Make in India” policy are:

1) The scheme covers both labour intensive and capital intensive sectors. Labour intensive sectors include textile, leather, auto components, tourism and hospitality. The capital intensive sectors include IT, defence equipment, aviation and space. Jobs may not grow fast in capital intensive sectors as technological advancement is reducing the need for manpower especially unskilled workers.

2) “Make in India” includes the “live projects” like the Delhi Mumbai Industrial Corridor (DMIC) and dedicated freight corridors apart from the other four corridors Bengaluru-Mumbai Economic Corridor (BMEC), Amritsar-Kolkata Industrial Development Corridor (AKIC), Chennai-Bengaluru Industrial Corridor (CBIC), East Coast Economic Corridor (ECEC) with Chennai Vizag Industrial Corridor as the first phase of the project (CVIC).

3) National Manufacturing Policy is being subsumed in the broader “Make in India” scheme. The object is to accelerate manufacturing sector growth to 12-14 per cent per annum so that the share of manufacturing increases from 16 per cent of GDP to 25 per cent by 2022 that in turn can create 100 million jobs.

4) New policy initiatives in the form of easing business processes, liberal FDI policy especially in defence and railways, allowing PPP in railways and enforcing intellectual property rights.

While the centre has provided the broader policy initiatives, states will have to shoulder the responsibility of providing faster project clearances, allotment of land, rationalising the tax regime and relaxing labour laws that are under their purview.

The “Make in India” strategy has to be a blend of policy mix that not only encourages large-scale manufacturing but also takes along the Small and Medium Enterprises (SMEs) to make the growth process more inclusive. What’s the use of rapid industrialisation if it does not benefit those at the bottom of the pyramid?

Broadly, the “Make in India” plan is biased towards capital-intensive sectors and hence eventually may not be able to generate jobs in large numbers. Will the new industry elbow out the existing units especially those in medium and small scale? The massive infrastructure development also requires large swathes of land, which may be hard to come by near big cities. If large parcels of land are to be acquired, will the government be able to keep the cost of infrastructure services down? What happens if a project fails to get all the necessary clearances and incurs cost and time over-runs? Are sectoral regulators in place to look into disputes in case of PPP projects? These questions require some serious brainstorming before one goes on an over-drive.

Focus on Hi-tech

The focus of “Make in India” policy is on the hi-tech industries ranging from microchips to electronic goods to aviation and defence wares. This is not just a policy prescription but a policy imperative given India’s current imports of hi-tech goods amount to $90-100 billion growing at a CAGR of 27 per cent. This is in contrast to hi-tech exports of most developing nations averaging at over 25 per cent. Unless such goods can be produced in India, we can’t cap the current account deficit within 1-2 per cent of GDP. Unless India starts manufacturing and exporting hi-tech goods, it can’t fund the imports of resource-based items–oil, coal and ores.

Since hi-tech goods are FDI-oriented, India needs to have a policy to attract foreign technology, which is the missing link for R&D, manufacturing and exports. While the investment allowances and duty cuts are encouraging for capital goods sector, there has to be specific concession for hi-tech industries. What’s important, a lot of Japanese and Korean companies are trying to hedge their Chinese bets and are looking at a second option. They can come to India if the government provides a congenial environment. Since, the WTO rules can’t restrain their production to the home country India should seize the opportunity of attracting such industries.

Since the growth of telecom and IT Sectors is outpacing all expectations, there is a need for a National Electronics Mission which will help in taking forward the national electronic hardware policy and promote India as an Electronics Hardware Manufacturing Hub.

The Rs10,000 crore fund-of-funds should be utilised for encouraging, innovation, entrepreneurship, IP creation in the Electronic System Design & Manufacturing (ESDM) and IT sectors.

Recommendations:

• The focus on hi-tech sector must be accompanied by a renewed effort to enhance the competitiveness of traditional sectors such as in jewellery, textiles, leather and handicraft, as they employ bulk of the labour force, continue to be a major foreign exchange earner and driver of growth.
• While rolling out the red carpet to investment in hi-tech industries, it should lend a helping hand to traditional industries by incentivising technology upgradation, ease business regulations, subsidise funding and provide marketing facilities both in domestic and overseas markets.

Unless workers are ensured alternate work or adequate social security, the labour reforms may back fire. The Govt may consider amending the Industrial Disputes Act for only National Investment Manufacturing Zones.

Global Value Chain

It’s not just hi-tech sector alone, as Modi has pointed out, India should aim at excelling in all industries – from electrical to electronics, from automobiles to agro value addition, paper or plastic, satellite or submarine. In a way, the message is that while India should aim to add more value in the final goods that are traded globally. This cannot be achieved unless we have a robust domestic supply chain for natural resources, raw materials, manufacturing facilities, technology and skilled labour.

For fostering growth in electronic goods, emphasis should be on semi-conductor fabs, which will positively impact electronics manufacturing in India. The semiconductor fab units when set up, will also stimulate the flow of capital and technology, create employment, build higher value addition in the electronic products manufactured and reduce dependence on imports.

Similarly, the government should frame enabling policy for encouraging R&D in auto and aviation sectors.

According to UNCTAD’s World Investment Report of 2013, about 60 per cent of the global trade, which today amounts to more than $20 trillion, consists of trade in intermediate goods and services that are incorporated at various stages in the production process of goods and services for final consumption. The fragmentation of production processes and the international dispersion of tasks and activities within them have led to the emergence of borderless production systems commonly referred to as global value chains (GVCs). India ranks lowest among the top 25 exporting countries with a GVC participation rate of 36 per cent as compared with China (59 per cent), Malaysia (68 per cent) and the world leader on GVC, Singapore (82 per cent). Anecdotal evidences show the higher the ranking of a country in the GVC, higher is the FDI flows and exports. Clearly, the “Make in India” campaign has to aim at raising India’s ranking up the global value chain. The industrial corridors coming up in the country could offer excellent opportunity for India to become hubs for electronics, capital goods and hi-tech goods. Already, Japan and Korea are setting up SEZs for their companies along the DMIC. Such initiatives should be encouraged in other upcoming corridors.

Recommendations:

• To achieve all of these, India needs to improve its capacity utilisation in mining to get coal, steel and other ores at competitive rates. Unless the government amends Mines and Mineral Development and Regulation Act to allow competition in mining, raw materials can’t be made available at competitive rates.
• Indian firms also need to upgrade their factories to turn the raw materials into intermediate goods at a reasonable cost.
• Skilling of workforce is a must to increase productivity and improve India’s competitiveness globally. The amendments in the Apprentice Act and Factories Act should be utilised by India Inc to improve labour productivity and enhancing manufacturing growth.

“Make in India” campaign has to aim at raising India’s ranking up the global value chain. The industrial corridors coming up in the country could offer excellent opportunity for India to become hubs for electronics, capital goods and hi-tech goods.

‘First Develop India’

While launching the “Make in India” campaign, Modi raised a pertinent point – FDI for him means “First Develop India”. The foreign investment flows easily in a country where returns are high, business regulations are congenial, IP rules are enforced, infrastructure is available, raw material and labour costs are low. While India provides a reasonably high return on investment, abundance of raw material and labour, it ranks

poorly on business regulation and infrastructure front. Over and above all of these, there has been quite a bit of inter-ministerial wrangle over hiking the FDI limits in sectors like retail, defence equipment and other sectors. For India to become a hub for manufacturing, FDI rules should be ridden of any complex riders. Defence is a classic example. It took India decades to recognise the fact that foreign firms will not be eager to share their technology with a local firm if FDI and hence the ownership is capped at 26 or 49 per cent. Unless 100 per cent FDI is allowed, the country can’t expect to attract state-of-the-art technology in defence equipment, some of which can be put to commercial
use such as in avionics and surveillance systems.

While there is no bar for electronics and capital goods production, the hindrances lie elsewhere. Without a favourable taxation policy, India cannot lure global companies to set up large manufacturing units. While SEZs were thought to be the drivers of exports, the minimum alternate tax takes away the competitiveness of such zones in India as compared with other countries. Moreover, the restrictions on domestic tariff area (DTA) sales should be relaxed so as to make manufacturing units in such zones viable especially during economic slowdown.

Recommendations:

• FDI will flow in large chunks if business processes are further streamlined. The government’s eBiz portal must integrate services of all central and state governments under a single window IT platform.
• Environmental and forest clearances must be made online with strict timelines.
• States must simplify and rationalise regulatory environment.
• All returns including for labour law compliance should be filed on-line through a unified form. All registers required to be maintained by the business should be replaced with a single electronic register. No inspection should be undertaken without the approval of the Head of the Department.
• Government must remove infrastructure bottlenecks to become an attractive FDI destination.
• All regressive tax rules including the GAAR and transfer pricing rules must be reviewed.

Strengthen SMEs

If India has to develop as a strong manufacturing base, it needs to strengthen SMEs. A comprehensive policy to help SMEs acquire cutting-edge technology at affordable cost, increased bank credit at lower rates, exemption from compliance of certain business laws including labour laws, skill development and marketing are the need of the day.

Venture capital funds and even banks should come up with innovative schemes to help SMEs upgrade and acquire latest in technology. Unless SMEs are strengthened, India’s supply chain will rely heavily on costly imports.

One of the main problems that come in the way of SMEs is bank credit. While the government and RBI have given some incentives for banks to fund SMEs, the lending rates still remain high. This makes them unviable and chokes their future expansion.

While it may appear trivial, the reason why Germany and other developed nations have globally competitive SMEs is because the way they define SMEs and nurture them. The European Union defines SMEs as those employing up to 250 employees and having 50 million euros (RS 400 crore ) in annual turnover.
In contrast, an Indian SME is defined in terms of capital investment – the last revision that came in 2006 stipulates investment in plant and machinery can be up to Rs 25 lakh for micro enterprises, Rs 5 crore for small and Rs 10 crore for medium sized companies. Obviously, SMEs in India remains hamstrung and it’s high time the definition is revamped by raising the capital investment limit to say 50 crore from the present 10 crore or adopt the EU definition. This is one big disincentive for a small company to grow bigger and become globally competitive.

The definition of SME needs to be changed specifically for hi-tech sectors such as defence and aero equipment, capital goods and electronics as these industries typically need higher capital base for supporting R&D but may not be labour-intensive.

Recommendations:

• Review definition of SMEs to encourage them to grow bigger and reap the benefit of scale of economy.
• Lending rates to SMEs should be lowered.
• A robust public procurement policy that necessitates sourcing of intermediate goods from SMEs is the need of the hour.
• Subsidise the technology upgradation costs of SMEs.
• Devise a marketing facility for SMEs.
• Review public procurement policy to absorb more goods from SMEs while ensuring quality.

With “Make in India” campaign, Modi has stuck the right note at the right time. But there is a need to carry out what the Japanese say “kaizen” – continuous small changes to make a big impact. All central and state government departments have to work on a war footing to bring about these nuts-and-bolts reforms to make the country a manufacturing hub.

Labour Laws

Another problem that the government will confront in scaling up manufacturing capacities is the archaic labour laws that not just prevent easy entry and exit of businesses but ties them with multitude of compliance issues. Although the NDA government has made a beginning by proposing amendments in the Factories Act, Apprentices Act and Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Act—the need of the hour may be to look at amending the Industrial Disputes Act, Contract Labour Act and Minimum Wages Act.

Even industry bodies are demanding amendment to the Industrial Disputes Act to raise the threshold limit from 100 workers to 300 or even 1,000 for a company to mandatorily seek government approval for retrenchment, lay-offs or closure of an unit to make hire and fire easier, the government needs to pay heed to the welfare of workers when proposing any changes. Unless the workers are ensured alternate work or a social security, the labour reforms may back fire. In the meantime, the government may consider amending the Industrial Disputes Act for only National Investment Manufacturing Zones (NIMZs).

Recommendations:

• All the archaic labour laws must be reviewed to help industry employ more people.
• Coverage of social security laws as laid down under EPF and ESIC must be widened.
• The compensation amounts for retrenched workers must be raised if Industrial Dispute Act is to be amended to make hiring and firing easy.
• NIMZs must have a flexible labour law with adequate safeguards for workers.

With “Make in India” campaign, Modi has stuck the right note at the right time. But there is a need to carry out what the Japanese say “kaizen” — continuous small changes to make a big impact. All central and state government departments have to work on a war footing to bring about these nuts-and-bolts reforms to make the country a manufacturing hub. While the government can only act on fiscal and administrative changes, the RBI has tobecome more responsive to growth and lower rates fast especially for the sake of SMEs, to make India competitive. There is no dearth of cheap labour and a little bit of handholding by India Inc can make them skillful. There is no scarcity of technical experts but they have to be conserved and nurtured by India for uplifting their motherland rather than allowing the brain drain to enrich the richer nations. If a billion people can contribute the best they have, nothing can come in the way of India becoming an economic super-power within a decade or two.