Make in India: Perception v/s Reality

It is always good to breakdown a complicated problem into parts for an easy understanding. Here let me take down the discussion by understanding the Importance of "Make In India", Past of Indian Manufacturing sector and then Claims v/s reality in Today's India

Importance of Manufacturing sector and Make in India:

No large country can become rich without manufacturing the goods that are consumed or demanded by its people. Most services, especially the basic, low technology and low value-added services will anyway be produced within the country. A country will move up the ladder of prosperity if it can manufacture the goods and produce the services required by its people and also export a considerable part of those goods and services.

Prime Minister Shri Narendra Modi was therefore absolutely right when he stated that his government’s goal was to give the highest priority to ‘Make in India’ and called upon the world’s manufacturing companies to “Come and make in India”.

Past of Indian Manufacturing sector: Manufacturing gaining its ground

The share of manufacturing in India’s GDP is about 16.5 per cent. Agriculture has declined steeply and the Services sector has risen sharply but, notwithstanding the changes in the shares of the two sectors, manufacturing has gained ground. 70 per cent of manufacturing units are in the private sector and about one-third of those are with the quasi-corporate and unorganized entities. Manufacturing’s share of GDP has risen steadily from 9.8 per cent in the 1950s to about 16.2 per cent in the 2010s. Our Government promised a further boost to manufacturing as part of its Make in India sloganeering.

To make a product and capture a significant market share is not an easy task. There may already be one or more persons making the same product. It may be imported too. To make the product, the intending manufacturer must make it better or cheaper or reach it to the consumer sooner or be able to offer something which makes his product more attractive to the consumer. It is here we face the hurdle of ‘factor costs’. Land, labour, electricity, technology, transport, cost of capital, cost of borrowing, and many others are factor costs. Unless some or all factor costs are favorable, no one will embark upon manufacturing.

The major manufacturing economies of the world have reached their positions by making factor costs more advantageous if the product were made in their countries rather than made elsewhere. Making in a country must provide a ‘competitive advantage’ to the manufacturer. Take cars. They were first mass-manufactured in the United States. When Germany and Japan emerged as major economies, they offered competitive advantages and the industry shifted to Germany and Japan. A few decades later, car manufacturing moved to South Korea. A couple of decades later, a significant portion of car manufacturing shifted to India.

The shift to India was not fortuitous. It was because of a well thought out strategy that was translated into clear policies. That story which began in 1991-92 deserves to be told separately.When our government promised to make India into a global hub of manufacturing, One assumes that it had been advised and it had reflected on the many hurdles that had to be crossed. 

We generally refuse to believe that ‘Make in India’ was just another slogan to enthuse the large gathering on Independence Day, 2015 but Is reality very different from what is artificially trending in social media and by so called Supari journalists?!

Claims v/s reality in Today's India:

Two years later, what is the status of ‘Make in India’?

The CSO has released the quarterly growth rates of Gross Value Addition (GVA) of manufacturing at constant prices (2011-12). I have placed them along side the growth of overall GVA:

	Manufacturing Sector GVA		Over all GVA
	2015-16	2016-17	2015-16	2016-17
Q1	8.2	10.7	7.6	7.6
Q2	9.3	7.7	8.2	6.8
Q3	13.2	8.2	7.3	6.7
Q4	12.7	5.3	8.7	5.6

Since the announcement of ‘Make in India’ on August 15, 2015, there is no evidence that manufacturing has gathered momentum. On the contrary, it seems to have lost steam and, in 2016-17, the sector had weakened considerably. Between Q1 and Q4 of 2016-17, the growth rate of manufacturing GVA had halved. The weakness of the manufacturing sector is reflected in the steady drop in the growth rate of overall GVA.

The conclusion is that apart from the announcement of ‘Make in India’, there has been little policy or administrative support. All other data points to the same conclusion. In the five quarters between Q4 of 2015-16 and Q4 of 2016-17, Gross Fixed Capital Formation (GFCF) as a proportion of GDP had declined — 30.8, 31.0, 29.4, 29.4 and 28.5. A drop of 2.3 per cent in 12 months is a disaster. Considering that GFCF was 34-35 percent only a few years ago and the government has done nothing to step up private as well as pubic investment, it is a catastrophe.

Data points to flop:

Data on IIP point to the same conclusion. In May 2014, the index was 183.5, in August 2015 it was 184.8, in March 2016 it was 208.1 and in February 2017 it had fallen to 190.1.

Data on credit growth point to the same conclusion. Credit growth to the industry sector has been negative since October 2016. Credit growth to micro/small and medium industries has been negative since March 2016 and June 2015 respectively.

Data on job creation point to the same conclusion. The eight leading job-creating industries created only 109,000 jobs during the period April-September 2016. That is a sign of stagnation.

Data on electricity demand point to the same conclusion. The average Plant Load Factor of thermal plants is about 60 per cent reflecting poor demand for electricity.

Everyone including me had welcomed ‘Make in India’. It was innovative and aspirational. Unfortunately, it appears that there was little homework done before and practically no policy support after. ‘Make in India’ has turned into a hollow slogan.

All data mentioned in the article had been taken from Bloomberg and CSO, Ministry of  Statistics

All views mentioned in this article are personal 

A brief view on the timing of Demonetization!

With all the debacles on “Demonetization" going around, this is not to give any arguments for or against the issue. Few questions, on the larger context have been coming across my mind in the hope of finding some answers, would like share some below.

Was this the right time? - Given the much known agricultural statistics of 58% employment dependency, 17 % contribution to GDP, 10 % contribution to exports and fourth most exported commodity. Have we largely ignored this space in planning this move? With Kharif season ending, and farmers planning to sell their produce, after much awaited better monsoons which probably had risen their expectations of better income this time. Can we afford to go for a cashless economy, and push some more farmers to the suicides or in the vicious circle of poverty? Also, there is a little gap between harvesting in Kharif and sowing in Rabi- If we might be reaping the benefit of lower food inflation today , created due to shortage in money supply leading to decline in aggregate demand ; Can we continue to do so in the next harvest, given there is always a supply lag in agricultural commodities? In long run undoubtedly this move might pull down inflation, but in short run haven't we compromised the "Zero Day vulnerability" of this important segment?

Isn't RBI an autonomous body? - According to RBI Act, 1935( by which RBI is governed) - “The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest,” , clearly stating that RBI is not a constitutionally autonomous body. Given the two bodies having similar objective of "Greater Good" but different (sometimes contradictory) instruments to attain it, with Government (Fiscal Policy) and RBI (Monetary Policy). Also, given the basic essence of the Constitution which has divided the powers of Judiciary, Executive and Legislature to encourage the system of checks and balances. Should we be worried about this increasing "coziness" between two bodies in present scenario, when the encroachment on one’s autonomy has already begun (which is also facilitated by the act)?

Can we afford to misunderstand working capital cash requirement, as a stock of Black Money? - To believe that black business is carried out with cash while normal business is carried out with cheques is a not correct. Because normal business also requires cash transactions. And if we demonetize a range of currency, we will also be disrupting this working capital cycle, which is an integral part of any small or large business. The working capital cycle (WCC) is the amount of time it takes to turn the net current assets and current liabilities into cash. Profit is calculated after simple adjustments made in assets & liabilities, and this profit is reinvested .The longer the cycle is, the longer a business is tying up capital in its working capital without earning a return on it. In light of persistent global slowdown ,fall in aggregate demand & investment and little success in "Make in India" campaign , can we afford to overlook the basic fundamentals on which these established business function ? According to the September data, IIP down only by 0.1% against 4% in previous year, Manufacturing up by 0.9%, and electricity production has also improved by 2.4%. If we fail to capitalize this opportunity, can it prove detrimental to the economy in times ahead? When experts have already speculated that Nomura current projection of growth which is 7.3 % in the December quarter, may actually be closer to 6.5 percent due to this unprecedented move.