Thursday, 1 January 2015

Make in India

India is an outlier in terms of economic development. Traditional economic theory suggests that in the beginning all economies are dominated by agriculture. As the economy develops, manufacturing becomes the predominant sector. Further up in the stage of development comes services. The linear development is the model for all countries, including China. The one exception is India.

India has never been a manufacturing economy and has leapfrogged to becoming a service economy. A full 55% of India's economy is the service sector. This is all fine, but for one problem. Where are the jobs for the teeming millions of Indians going to come from ? You need a big manufacturing base to absorb the youth coming into the job market every year. India has to create 12 m new jobs every year. Hence the Make in India need.

India actually has a huge competitive advantage now - it is actually cheaper as a manufacturing destination than China. China has become expensive, but retains its predominant position simply because there is no real alternative at that scale. Countries like Vietnam or Bangladesh are small. The only big competitor is India. 

Achieving real manufacturing scale and , thereby jobs, will need concerted action over 20 years. Mere slogans will, of course, achieve nothing. This has to be backed up by proper policy action.

What is needed to be done ?  Quite a lot actually, but let us begin with three things that do not need to be done

- Tax incentives to manufacturing. This is the soft option, but must not be done. Neither is it necessary nor is it equitable to do so.

- Lowering interest rates. All the pressure on the RBI governor is self serving bullshit. No serious company makes investment decisions based on short term interest rate

- Diluting labour laws. Actually this is hardly needed. Labour laws, other than when factories are closed, are actually sensible, fair and progressive in India today. It is better than, say, in France. We should not dilute labour laws and allow the Rambo manufacturing that  happened in China.

The key elements that need to be tackled are

- Amending the Land Acquisition Act. The last Act completely swung the other way and as it stands now it is almost impossible to acquire land to set up a factory. The government, realising this, is acting through an ordinance

- Infrastructure - Ports, Roads, Railways and Power. This will take time, but must be done largely by the government, although partnership with the private sector will also be key.

- Single window clearance from the government. All clearances within 3 months for setting up a factory.  Doesn't matter if a mistake or two is made.

- Remove all caps on foreign investment in manufacturing. Who cares where the money is coming from as long as jobs are created. 

- Rein in Ramamritham. If possible chop him into bits and throw him into the sea. You just have to drive through Sriperumbudur, on the outskirts of Madras to see the havoc Income Tax Ramamritham has caused. Shut factories - Nokia, Foxconn ...... Any industrialist who now starts a factory without a cast iron defence against Ramamritham is an idiot.

- Enforce contacts and the rule of law speedily. Perhaps even a separate judicial process for business matters. One of the sad facts in India is that despite the rule of law, contracts, especially with the government, are practically unenforceable.

- Make India, one India. Each state competes with others to create bottlenecks and roadblocks, because of the preponderance of local Ramamrithams. National laws, such as the GST are an imperative. The Centre cannot dictate this, but should simply go ahead with the willing states and leave the outliers either to join the bandwagon or suffer.

- Stay the course. Create the framework and then don't change it for a decade at least. Let a thousand flowers bloom !

None of this is even politically contentious in a major way. Start and build  momentum. Investments will come. Money will be found. A juggernaut, once started, cannot be stopped - there is already the example of the IT industry.

Motor ahead, India.


Sandhya Sriram said...

i am the first to comment this new year :-) Ye Ye !!

to start with Ramesh - wish you a very happy new year

I agree that the processses need to be debottlenecked, there has to be better infrastructure and simpler land acquisition (I dont know if many people can forget Singur) and the havoc of ramarathinams have to be solved (who have successfully made a major giant like Nokia bite dust and move significant manufacturing out of India), but i also feel that tax incentives are something that are a significant motivation. The absolute cost of manufacturing is still the key and taxes are still a significant share of the costs. the second is to curb the artificial inflation on real estate. Real estate in India gallopping at a 15% inflation every year - not because of demand supply but because these are just simply jacked up. Real estate in India, is very much like the oil boom. and a lot of the money that it has created is going to fund criminal activities of many politicians, so as worse as oil money behind terrorism. and finally, pro-actively skilling the labour. walk into an anganwadi and see what kids learn, most of the time, it is a tick off to move a person from uneducated to educated. is there real education - i really doubt. i think, the kid would rather be better off, learning employable skills rather than unemployable curriculam.

b.t.w hope this year keeps raining more and more such posts on us and wishing you a fulfilling year ahead.

Ramesh said...

Thanks for your wishes Sandhya. Wishing you a great 2015 as well and may you rain posts as well :)

Yes, real estate is a hotbed of criminality, corruption and a get rich scam. However that problem is largely in urban real estate. In rural India, where manufacturing will largely be located, it isn't that bad, although the mere whiff of an industry coming, the usual goons drive up prices and corner land.

My problem with tax incentives is that it simply is a subsidy for the rich. Taxes in India are not that high - they are comparable with most countries. So let factories get set up based on market forces for products rather than on artificial incentives. Look at what happened when incentives were offered in Himachal, Uttaranchal, etc etc.

Shy said...

Hey!!! A very happy new year!! simple yet sparkling with clarity - for a layperson !! always look forward to your posts -most of them anyway!! :) Agree it will be manufacturing that will move youth away from being employed as goons,jihadis,myriad other useless things if they were gainfully employed! when focused on their own economic is always shown that crime rate also dips I truly wish the commie bureaucrats who are the true bottlenecks ,who have been used to decades of non decisiveness,non performance actually step up... or the Modi govt just changes those buggers!!

Ramesh said...

Very happy new year Shy and thanks for the kind comment. Yes, Ramamritham has a lot to answer for, in the state of affairs of manufacturing. It is too much to expect him to change spots or be decisive - he can only be "managed" as Jaitley is trying to do.

Anonymous said...

Hi Ramesh...
A very happy new year.. Blog looks great in its new form and as usual a very clear post..
I would probably add a simplification of business laws - Inc Tax & Customs as well along with the GST point..
Lack of strength in the rajya sabha is hurting the govt in implementing some of these and as usual the opp takes up the most insignificant points (espcially on "saffron" issues) to cause a ruckus and derail anything that the current govt wants to do..


Ramesh said...

Thanks Exkalibur. New Year greetings to you too. I agree simplification of laws i a big issue - in fact gives me idea for a post !

The behaviour in the Rajya Sabha is unfortunately very typical of our MPs. When the BJP was in the opposition, they did exactly the same thing. When they do such nonsense, the sitting must simply be prolonged day and night until the job gets done. Shame on this unruly lot.

Ravi Rajagopalan said...

Welcome back ramesh. Happy New Year.

There were some interesting comments made in the Economist, I think, attributed to Arvind Subramanian - IIMA Alumnus, Economist and now Chief Economic Advisor to the GOI. He says that the average income level at which a country can consider itself reasonably industrialised has been dropping. In other words industrialisation is failing to raise income levels sufficiently. In the case of Japan and South Korea, which industrialised when supply chains were not as disaggregated and super-efficient as they are now, the country first made cheap goods for export, then assembled more complicated goods, learnt how to make them and then innovated. This is because the cost and other advantages that lead them to get some share of the world market in the first place were reasonably sticky. So the country could focus on the longer cycle of innovation in value added manufacturing. This requires investments in other areas of the domestic economy - a domestic ancillary industry, local education, local services, R&D etc. This allows incomes to rise while increasing the volume of manufactured export. At some point the cost advantage disappears and the low-end manufacture migrates leaving behind the higher end of manufacturing a mature economy. Subramanian feels India has missed this revolution. Given highly efficient supply chain management, the moment a unit cost of assembly for a part of a finished good rises relative to another country, the buyer will switch the manufacture. It will become difficult to replicate Japan and South Korea.

I think Make in India is very much necessary and your policy prescriptions are all fine. I just think that the focus should be on encouraging the domestic market to drive local manufacturing capability. In the area of electronics this is already happening. So is the case in textiles for instance. Is there a chance that this can happen in other cases?

This is not a case for "import substitution" - it distorts the economy. But a conducive environment for manufacturing is extremely necessary.

Ramesh said...

Thanks Ravi and happy new year to you too.

A very incisive and thoughtful comment. Cost as a factor for manufacturing location is disappearing as a competitive advantage I believe, as labour costs fall to lower and lower proportion of total costs, because of automation, efficiency and customer access starting to become a bigger costs. Therefore mere cheap labour is no longer a winning hand. Scale, flexibility, infrastructure, etc become more important factors and this is why I think China is still the preferred manufacturing destination despite having lost the cost advantage sometime ago.

As you rightly observe, import substitution is a naive idea (except perhaps for defence industry in India). Manufacturing must be for job creation and as you say the best market for it can be the large domestic market that is India.

Sanjay Balachandran said...

Welcome Back Ramesh. I hope that Modi revamps the manufacturing industry as book his place in history. Our generation was lucky that jobs were aplenty due to growth in BPO and IT. If our next generation has to get jobs the manufacturing has to grow.

Ramesh said...

Thanks Sanjay. Even our generation was lucky only in the sense of the educated. For the many millions more who do not have education, there are still no jobs. This is the group which manufacturing has to tackle.

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