Economy

The Chequered History of Make in India and What Modi Must Do to Make it Work

India’s industrial development has gone through three distinct phases. Prime Minister Modi’s ‘Make in India’ is the fourth such initiative. It is in India’s interest that this attempt succeeds in taking manufacturing’s share in GDP to 25% by 2025.

How to make the sparks fly. Credit: ILO/Flickr CC NC-ND 3.0 IGO License.

How to make the sparks fly. Credit: ILO/Flickr CC NC-ND 3.0 IGO License.

Prime Minister Modi will launch “Make in India Week” in the nation’s business capital on February 13, a fortnight before the Union budget. Investors and entrepreneurs will wait to see if the budget and, more importantly, the annual national economic policy statement of the finance minister, called the budget speech, will unveil policies that would enable them to make more in India.

Of all the policy initiatives taken by Modi none is of greater strategic importance for the country than his ‘Make in India’ programme. Its key purpose is to step up the share of the manufacturing sector in national income and employment and, thereby, promote economic development and the modernisation of the economy. Ironically, like the Clean Ganga initiative, it is also an idea that has been around but whose time was waiting to come.

The roots of Modi’s ‘Make in India’ initiative in fact lie embedded in the ‘National Strategy for Manufacturing’ prepared in 2006 by the National Manufacturing Competitiveness Council (NMCC), set up by the United Progressive Alliance government. Welcoming that report, Manmohan Singh, who was PM at the time, said, “Inadequate growth in manufacturing has had its adverse impact on employment generation. … Manufacturing has to be the sponge which absorbs people who need to move out of agriculture in pursuit of higher incomes. I do not accept the proposition that India can skip the manufacturing stage of development and go from being an agrarian society directly to becoming a services and knowledge-based society.”

Singh directed the NMCC to prepare a strategy paper that would address concerns that were widespread at the time that the share of the manufacturing sector in national income had virtually stagnated for over a decade at around 16%. Since then, it has remained stubbornly around that level. The ideas from the NMCC strategy paper found their way into the Planning Commission’s 12th five year plan strategy but the second UPA government (especially after 2010) lost its way, unable to think creatively about promoting manufacturing sector growth through supportive land, labour and environment policies. To make matters worse, it brought in changes to company law that reduced the ease of doing business and created uncertainty on the tax front both through policy changes and arbitrary actions.

UPA’s ‘Make in India’ strategy was, therefore, still born. It is to the credit of Modi that he has taken these ideas forward with his own version of ‘Make in India’.

In fact, the new initiative is the fourth attempt to promote ‘make in India’ in manufacturing.

Make in India I: The Raj

The first phase of policy-supported industrial development in India, in the inter-war period, was launched when the colonial government in Delhi took steps to address the Indian nationalist grievance concerning the lack of industrial development. The imperial government accepted a recommendation of the Fiscal Commission in 1922 to extend tariff protection to a few Indian businesses as a measure of support to encourage localisation of manufacturing. The policy of ‘discriminating protection’ gave a boost to such industries as cotton textiles, sugar and iron and steel.

Interestingly, more than the policy itself, it was the Second World War that really promoted industrial development on the eve of independence. The disruption of maritime trade by the war cut several imports off, giving a boost to domestic manufacturing. On top of this, war demand for clothes, munitions and other supplies further increased demand for Indian manufactures. New industries like ship building and aviation took root during this brief interlude.

Make in India II: The Nehru Era

India’s second, and more concerted, attempt to make in India followed the adoption of the Industrial Policy Resolution of 1948 and the articulation of an industrial development strategy, popularly called the Bombay Plan, by the leadership of Indian business.

Written by John Mathai, who became Jawaharlal Nehru’s finance minister, G D Birla, J R D Tata, Purshottamdas Thakurdas and Ardeshir Dalal the Bombay Plan influenced government thinking and the ideas it articulated coincided with those of India’s planners such as P C Mahalanobis and K N Raj. The creation of an industrial base by the public sector was one such idea. The 1st five year plan (1951-56) and, more importantly, the 2nd five year plan (1956-62) promoted domestic manufacturing, most of it in the public sector. Consequently, the share of manufacturing in national income went up from around 8% in 1950 to around 12% in 1965.

This share remained stuck in the range of 12-13.0% for another decade. It was only in the late 1970s and the 1980s that the average annual share of manufacturing in national income rose to around 15%. A surge in industrial activity in the 1980s and 1990s enabled a further increase in the share to around 16%. Thus, over half a century of post-independence development, between 1950 and 2000, India managed to only double the share of manufacturing in national income, and that ratio has since not improved by much. Several East and South-east Asian economies were able to treble and even quadruple the share of manufacturing in national income during the same period. Clearly, something had to be done.

Make in India III: From Rao to Manmohan

The 1950s surge in industrial production petered out in the 1960s. Thanks to the Green Revolution and the generation of rural demand for manufactures, there was a revival of manufacturing activity in the 1980s. This received a policy boost in 1991-92 with Narasimha Rao’s decision to end the infamous ‘licence-permit raj’, to decontrol, deregulate and open up several manufacturing sectors to private investment. The 1990s saw another round of growth in manufacturing activity. More importantly, it saw the flowering of Indian enterprise across several sectors including automobiles, plastics, consumer goods, pharmaceuticals and so on. Unlike the public sector led industrial development of phase II, phase III manufacturing was led by the private sector. Both domestic enterprise as well as multinational companies fuelled this process.

This wave of manufacturing growth petered out after a decade. After 2000, Indian manufacturing has had to deal with two major challenges. First, the more liberalised global trading environment following the creation of the World Trade Organisation and India’s decision to sign on to several free trade agreements, especially with East and South-east Asian economies.  Second, increased trade with China.

As if these external challenges were not enough, domestic business also found the home environment for industrial development deteriorating. While the licence raj had gone, domestic business – big, medium and small – has been complaining about the suffocating tentacles of a hydra-headed ‘inspector raj’, of corruption – big and petty – unhelpful land, labour and environment policies and deteriorating logistics and infrastructure. While in Phase II, Indian business could only complain, in Phase III they have had the option of opting out and investing overseas. Several Indian manufacturing establishments have invested abroad, finding foreign lands more hospitable.

make in India III vs IVMake in India IV: Modi’s Plan

To add to this background of non-supportive policies, weak infrastructure and the difficulty of doing business at home, the new challenge for industrial development in India is the deterioration in the global economic environment and the emergence of new plurilateral trading arrangements like the Trans Pacific Partnership (TPP). These new trading arrangements are coming up against the backdrop of slower growth in world trade and the growing political demand for protectionism in developed economies. Finally, while most of the above are mainly supply side challenges and issues, Indian manufacturing is also facing a demand side constraint posed both by declining exports and a slowdown in the growth of the home market for manufactures.

In launching his Make in India initiative, Modi has added new sectors to the UPA’s original version and has sought to focus on defence, tourism and information technology-enabled businesses. He has also widened the scope of policy to include skill development, through Skill India, and the promotion of new and small enterprise, through Start Up India.

Both the UPA and the NDA governments have identified (a) poor policy planning (b) a lack of stakeholder (read political ) consensus and (c) weak inter-ministerial coordination (sectoral policies working at cross purposes) as the key reasons for the slow growth of manufacturing over the past decade. Make in India IV seeks to address these challenges.

The key objectives of the new initiative are to increase the rate of growth of manufacturing output from the low single digits, where it has been stuck for some time, to 12-14%; to raise the share of the manufacturing sector in national income to 25% from the current 17%; to generate 100 million jobs in manufacturing and to ensure environment-friendly industrialisation that improves Indian industry’s competitive position globally. Among the indices that the government will monitor to ensure it is on track, a key indicator would be India’s rank in the global Ease of Doing Business index.

PIE in the sky?

While it is easy to be skeptical of yet another policy initiative to push Indian industrial development forward, there is no denying that the Make in India initiative is an important one, especially at a time when the prospect for labour-intensive manufacturing growth seems uncertain.

The “Make in India” website says that the Make in India Week would be one “that will spark a renewed sense of pride in Indian industry by showcasing the potential of design, innovation and sustainability across India’s manufacturing sectors in the coming decade.” The website is well-designed, comprehensive and informative and could well enthuse many to believe in the government’s intent.

Going beyond sparking pride, however, the government should convincingly address concerns pertaining to (a) policy and (b) infrastructure, while encouraging new (c) enterprise. Policy-Infrastructure-Enterprise (PIE) are the three key elements needed to make a success of this new initiative.

Though much has been done, and more promised, policy concerns remain about mixed signals and confusion on priorities. While Central government policy would apply uniformly across the country, the fact is that firms take decisions to invest in one or another part of the country. Thus, investment decisions would be influenced not just by Central policies but also the policy of state governments and the infrastructure support they offer.

For these reasons, the manufacturing sector has remained largely localised in a handful of states including Gujarat, Maharashtra, Tamil Nadu, Haryana and a couple of other places. When state governments have been aggressive in seeking new investment, as was the unified state of Andhra Pradesh (and its successor states of AP and Telangana), they do manage to break this pattern. In the near term, however, a new wave of industrialisation will remain confined to the already industrially developed states, with a few states like Madhya Pradesh and Rajasthan making a dent in this geographical pattern, especially thanks to the Delhi-Mumbai Industrial Corridor project. However, it is unlikely that areas east of the national capital region of Delhi will find many new investors rushing in.

What will also shape the geographical distribution of new manufacturing activity will be the nature of enterprise. Historically, Indian enterprise has been geographically localised in western and southern India. While some north and western Indian business groups migrated east to Bengal during British rule, most have returned to the western and northern Indian region. The eastern states have not generated local enterprise on the same scale as other parts of India.

Foreign investors have also preferred to walk the trodden path and have opted to base themselves in the traditional manufacturing states of Gujarat, Maharashtra, Tamil Nadu, Karnataka and the region around Delhi. This pattern too will persist.

What this means is that the next wave of industrialisation will see even more internal migration in India, since the job-seeking youth will come mainly from northern India, while new industries are likely to come up only in peninsular and western India.

The final, and the toughest, challenge for the success of Make in India lies in Indian industry’s ability to develop new technologies, new products, new brands and enter new markets. India has many success stories that would inspire new entrepreneurs, but it needs more and Indian industry has to scale up to be globally more competitive. New strategic alliances with countries like the United States, Britain, Germany, Japan, Korea and Taiwan can help the new Make in India drive. Building a competitive industrial base is a challenge that free India took up more than half a century ago. It is a challenge waiting to be fully and properly addressed.

Sanjaya Baru is Honorary Senior Fellow, Centre for Policy Research, New Delhi