Figure 1, Source: Make In India. (n.d.) Figure 2, Source: The Deccan Chronicle (2014)
The old proverb asks to make hay when the sun shines. In his recent policy reform proposals for manufacturing, Prime Minister Modi asked the world to ‘Make in India’ when the time is right. India’s working age population is set to increase to over 64% by 2021 when India may become the world’s youngest country. Positioned to have a fifth of the world’s working age population even as China, Japan, Korea and the rest of the western world face problems of ageing and rising wages, India’s opportunity should not be overlooked. Skeptics wonder however if India is a ticking demographic time bomb: can India create jobs for the more than 10 million people who will join the work force each year for the next decade? No doubt India’s untapped potential lies in labor intensive manufacturing, which can generate the additional employment and envisioned GDP growth.
With over 1.2 billion people, India is the world’s second most populous country after China. Yet China accounts for 22.4% of global manufacturing and India accounts for merely 2%. Manufacturing contributes just 11% of jobs and 15% of GDP. Neighbors Pakistan and Bangladesh have a higher share. Surprisingly, idols of Ganesha and other Indian gods are ‘made in China’. Even in such low-skilled labor intensive manufacturing sectors where India should have a stronghold, India lacks the economies of scale that China offers. In the apparel sector too India lags behind China, Bangladesh and Vietnam.
The major challenges for manufacturing include a largely unskilled labor force, bureaucracy, red-tape, stringent FDI regulations, restrictive land acquisition and labor laws, inadequate infrastructure and inadequate energy supply. Such restrictions make it difficult for India to develop SEZs and attract FDI to the scale that China has. The World Bank ranks India 134 of 189 countries for the ease of doing business. India ranks 179 for starting businesses, 182 for dealing with construction permits, 111 for getting electricity, 158 for paying taxes, and 186 for enforcing contracts. Its best rankings are 28 for getting credit and 34 for protecting investors.
A third of India’s labor force growth is projected to stem from states including Uttar Pradesh and Bihar, which are poorer and less literate. However both unskilled and skilled labor is susceptible to unemployment; some estimate that only half of India’s graduates can get work. 11% of the work force is employed in casual formal-sector jobs, and 85% in not incorporated informal sectors with less than 10 staff. Most ‘industrial workers’ are actually unskilled construction laborers. Policy reforms need to attract FDI and skill up the work force.
The ‘Make in India’ campaign promises to address just these issues. Reforms include measures to cut red tape, liberalizing FDI, amending labor laws, developing industrial corridors and smart cities, and establishing best business practices across states. Several pending road and rail projects have been approved. A new national industrial corridor authority is being created. The industrial licensing process has been made online, with licenses now valid for three years. The License Raj is discontinued and all departments can file online returns using a single form. There are timelines for application processing and security clearances. The Factories Act, Apprentice Act, and a number of labor laws will be amended to make it easier to hire and fire. In addition, the ‘Skilled India’ program has also been launched.
Automatic 100% FDI is allowed for suburban rail corridors, high-speed trains, freight lines, locomotives, coaches, freight terminals and signaling systems. Defense FDI jumped from 26% to 49%, and in specific cases up to 100%. Foreign portfolio investment in defense up to 24% is allowed. 100% construction FDI is allowed for smart cities.
The government will provide over 1.6 billion USD for equity and debt funding for startups, and over 32.6 million USD to support innovation, entrepreneurship and the agro industry. To boost ship building, ships are permitted to flag out of country and are given life time licenses.
Critics question whether ‘Make in India’ is just a far-fetched dream or will really implement the change that India needs. Just a month after the launch of ‘Make in India’, Nokia announced plans to shut-down its factory in Chennai employing 6600 full time workers because of a tax dispute with the government. Yet the proposed reforms are an important first step for the government after decades of turning a blind eye to India’s manufacturing predicament. Mr. Modi’s message also is that by making in India and allowing India to prosper, the world can benefit from India’s consumption potential.
Launch of “Make in India” Campaign by Hon’ble Prime Minister of India (English Version). (2014, September 25). Retrieved October 2014, from Youtube: https://www.youtube.com/watch?v=h62TByEgu4M
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Basak, Sanjai (2014, Aug 16). Prime Minister Narendra Modi tells MNCs to ‘make in India’. Retrieved October 2014 from Deccan Chronicle: http://www.deccanchronicle.com/140816/nation-current-affairs/article/modi-tells-mncs-make-india
Make In India . (n.d.). A MAJOR NEW NATIONAL PROGRAM. DESIGNED TO FACILITATE INVESTMENT. FOSTER INNOVATION. ENHANCE SKILL DEVELOPMENT. PROTECT INTELLECTUAL PROPERTY. AND BUILD BEST-IN-CLASS MANUFACTURING INFRASTRUCTURE. THERE’S NEVER BEEN A BETTER TIME TO MAKE IN INDIA. Retrieved from http://www.makeinindia.gov.in