Two Years Since Make in India

In this article, Ashwath Komath revisits the arguments for the Make in India programme, nearly two years since its conception, to assess whether it is truly needed and beneficial in the Indian development context.

As the Modi government turns two on May 26th, we should take a look at his past initiatives, one of the dearest, being the “Make in India” campaign, inspired by the Chinese model of export manufacturing. Now, there is no denying that manufacturing has done wonderful things for China and perhaps, its biggest achievements are not just limited to massive growth, but also the indelible infrastructure, advanced capabilities and other residuary benefits that come from a large-scale industrial infrastructure.

Conventional economic sense tells us that skipping the second-phase of growth in an economy, which is industrialization, doesn’t prove to be efficacious for the long-term interests of the economy. But in the case of India, in this day and age, there are fundamental changes and shifts that may differ with this logic.

The Changing Nature of Manufacturing

Predominantly, we must try and understand that the very nature of manufacturing around the world has changed. Outsourcing manufacturing to other countries from the West was viable especially when wages in countries such as China and India were low. We are now looking at a position where China has been experiencing a slump in manufacturing because wages have risen and that cost advantage does not exist anymore.

Another explanation is that as manufacturing has evolved through the years, it has by its very nature, reduced the need for labour. Technological improvements, especially in sectors like robotics and electronics, has significantly brought down the cost of such technology and more importantly, has promised savings by eliminating the need for labour. So, manufacturing today would provide a much lower prospect for increasing jobs than it would have in the past years.

Another consequence of this technological component is that, given the lack of a cost advantage in labour, firms find it much more prudent to retain their manufacturing in the countries that they are based out of. When we look at the case of the United States, there is a visible stigma attracted by outsourcing, and businesses seem to be more interested in retaining their manufacturing departments in the States. Government policies that discourage outsourcing has also helped in retaining manufacturing bureaus within the borders.

For India, this would mean that it would have to rely more on domestic firms to increase production and initiate innovation rather than waiting for outsourcing by foreign firms.

The Roadblocks

In that sense, while Make In India is a laudable initiative, its effectiveness in the long-term is still uncertain. For one, manufacturing still relies on a good base of technical knowledge and more importantly, vocational skills. Successive reports have shown that India has a serious lack of vocational capacity. Even when we look at the dissemination of STEM subjects, especially engineering, we see, yet again, an abundance of literature which seems to suggest that the imparting of education is far from satisfactory. Without skilled labour, there doesn’t seem to be any incentive for people to invest in manufacturing.

The other factor is that of Research and Development (R&D). While in absolute terms, India may have invested a lot in R&D, it is quite low as a percent of GDP. This becomes even more important when we think about money invested in R&D by corporates, who stand to gain the most from relevant research and innovative capacities. When Indian firms don’t invest as much in R&D, the scope for innovation is rather less and the economy fails to upgrade qualitatively, which is bad in the long-term.

Innovation is a function of competition. When other states are able to find those technological breakthroughs that enable them to have newer products, manufacture them cheaply and in bigger quantities, they gain an advantage over the others. In this sense, innovation and R&D are a zero-sum game.

Next we come to bureaucratic delays. As much as the Modi government likes to tout about India’s increase in the Ease of Doing Business, it remains hideously below 100. To be fair to the Modi government, the very structure of bureaucracy was built around inefficiency and it was prevalent a long time before the Modi government came to power. It would be foolhardy to believe that things should change overnight and usher in an age of economic liberalism.

The Flip Side

Make in India currently boasts of several governments and corporates pledging to invest billions of dollars in Indian manufacturing. However, one needs to watch out for the simple reason that the pledges mean nothing without a good conversion rate to real investments in manufacturing capabilities and interest. Indicators of such a conversion show that perhaps Make in India has not been as grandiose as has been claimed.

This doesn’t mean that the Make in India scheme has been a sham. Even eliciting the interest of governments and corporates around the world is indeed a positive indicator. While it is not possible to make India a manufacturing powerhouse overnight, Make in India is a good excuse to improve the fundamentals of mass manufacturing and create an enabling environment for it to thrive. A good manufacturing and industrial base has so many residual benefits that is essential for a country this big. Make in India should be embraced not for the immediate benefits of manufacturing, but the residual benefits it is bound to bring in the long-term, including innovation and infrastructure.

Buyers Beware

There are certain things we need to keep in mind about Make in India while going ahead.

One, Make in India is no guarantee of creation of jobs in the future, and definitely not the numbers that the Modi government has been touting. The nature of manufacturing has changed and it doesn’t hold the kind of promise like it used to in the past decades. We need to move past viewing the secondary sector as a mere job-creation vehicle and as an important function of value-addition, which India clearly needs.

Secondly, there are many more structural roadblocks that need to be overcome if India is to find success in Make in India. Funnily enough, it needs to actually be promoting its other schemes such as Digital India, Skill India and Start-up India, in order to address the vast deficits in the structure and strengthen the Make in India initiative.

Thirdly, one must be very skeptical about the numbers that are being thrown around in the context of Make in India, for the simple reason that bringing about a resurgence in manufacturing has more intangible benefits as opposed to hard-core numbers and statistics. Predicting the outcome is rather murky, simply because there are so many factors involved in it, including the perfect execution of the scheme by the government which is a near-impossible task. Since the numbers are dependent on so many variables, any numbers being thrown is at best a calculated guess and not a statement of fact.

So all in all, while Make in India on paper seems to be a good initiative, there are realities on the ground which are sobering and not as rosy a picture being painted in this context. The rate of success of the initiative depends on the will to execute the fundamentals properly. It is easy to get Make in India quite wrong simply because it is not a hot-button issue where normal people are intensely interested in the details. Simplistic narratives can paint a rather deceptive picture of the programme and undermine it.

Ashwath Komath is an aspiring diplomat and takes a keen interest on economic and political issues. He is also author of a book titled “Musings on the Islamic State”.