Why the government's Make in India gambit is unlikely to work

Marred as it was by the Jawaharlal Nehru University controversy, February 13-18 was meant to be Make in India week. This was to mark the culmination of 16 months of efforts towards the Make in India initiative, which the official Make in India website states is intended to “transform India into a global design and manufacturing hub”.

But is Make in India going to work? In this briefing, we explore the challenges that lie before this initiative, and the extent to which the policies that form part of Make in India are likely to tackle them. What we find is that this initiative is not only unlikely to reach its goals, but it may also lead to a worsening of some of the basic structural problems of India’s economy. These include poor infrastructure, poor levels of public services, particularly health care and education, and the very low income levels and consequent low purchasing power of most Indians.

1. The vision behind Make in India

The exact goals of the Make in India initiative have never been spelled out, but the broad approach appears to be encouraging large enterprises, particularly multinationals, to manufacture in India for global markets. In the development literature, this is a familiar strategy, usually described as “export led industrialisation”. Within India, comparisons to China’s gigantic manufacturing boom are common. In turn, such manufacturing growth is considered necessary because it will generate employment – without which neither development nor political popularity is deemed possible. As one of the NDA government’s most well known supporters recently declared, “the most important thing [Prime Minister Modi] can do this year is to find out why more jobs are not being created.”

This approach to India’s development problems is not new, and has been at the core of successive approaches by the government, across political parties, for over a decade. The previous United Progressive Alliance government also repeatedly instituted similar policy measures, beginning with the Special Economic Zones Act in 2005 and culminating in the 2011 National Manufacturing Policy – which set an objective of “enhancing the share of manufacturing in GDP to 25% and [thereby] creating 100 million jobs.”.

In this sense, what is new about Make in India is not the policy initiative itself, but the extent to which it has been made central to the political project of this government. Prior to the 2014 election, the Bharatiya Janata Party consistently projected itself as being capable of delivering a private industry-led, heavy manufacturing centred model of development that would generate employment and prosperity (these being the key elements of the claimed Gujarat model). The September 2014 announcement was hence entirely in keeping with the BJP’s political mandate.

This political centrality increases both the intensity with which Make in India is likely to be pursued – and the risks that it is likely to bring with it.

2. External challenges

The Make in India initiative faces two sets of challenges. The first set originates in the external environment.

These external challenges are perhaps most clearly visible if we compare the current global context with that experienced by the country most commonly compared to India – China. Broadly, China ascended to its position as the manufacturing hub of the globe in the 1990s and early 2000s, following its industrialisation boom in the 1980s. During this period, both the European and US economies were experiencing stable and high levels of credit-fueled consumption growth, providing ready markets for Chinese products. The liberalisation of global trade in this period also removed several of the barriers to export that had been imposed earlier (such as the Multi Fibre Arrangement that imposed quotas on the amount developing countries could export to developed countries, which expired in 2004). Global finance was also expanding rapidly. Into this relatively positive context, China brought two particular advantages of its own.

First, it had a population that was literate, relatively educated, and with much higher standards of health care and nutrition than India’s (notwithstanding setbacks on all of these fronts after the start of the reforms process). Second, after the early 1980s, the entirety of China’s powerful machinery of economic and political regulation – including its control over the levers of loans and finance, and its ability to mobilise and/or repress large segments of its population – was devoted to an almost single-minded focus on industrial production for export.

The current global context is, of course, very different. The 2008 global financial crisis has had a number of effects.

First, and most directly, it has meant that consumer demand in the US and Europe has sharply declined. As Reserve Bank of India governor Raghuram Rajan put it in December 2014: “the world as a whole is unlikely to be able to accommodate another export-led China.” A strategy aimed at increasing manufacturing for exports is hence likely to find far smaller markets for those exports than markets that existed, for instance, 20 years ago.

The financial crisis has had two further spin-off effects. The first is that existing industrial manufacturing centres – such as China or the East Asian countries – are functioning well below their production capacity (see for instance here or here). Factories are under-producing, or even idling, as a result of low demand. This means that even if industrial country markets begin to recover, there are other countries that will respond to that increased demand more quickly and more effectively than India. Alternatively, if India begins to undercut these manufacturing centres, they can respond by increasing their own production and matching Indian rates – without the high upfront costs that greenfield investment in India would require (see next section).

The second spin-off effect of the crisis has been the impact on international finance capital – in the form of credit (loans) and share investment. This has, first, shrunk in absolute terms. What remains has also become much more focused on short term, quick gains rather than on long term and risky investments. At a time when there are ongoing recessions in the developed world, and even warnings of another crisis, investors have a very low appetite for risk, particularly with dismal reports coming in from China. This problem has particularly serious implications for India.

3. Internal challenges

These external challenges are then compounded by structural problems in India’s economy. We described several of these in our earlier thematic briefing addressing threats to investment in India.

The first challenge might broadly be described as the inability of the Indian state to fulfill the expectations of private, particularly international, capital. It has become a cliché to state that Indian democracy differs from Chinese autocracy or from the authoritarian regimes that delivered industrial transitions in most East Asian countries. But this cliché reflects two deeper truths about India’s regulatory environment.

First, it manifests in the form of cronyism and corruption. China’s administration, or indeed the regulatory administration of most countries, is no model of scrupulous honesty; nor are most large companies. Corruption that is predictable is both acceptable to and, indeed, often welcomed by businesses seeking to make investments – the destructive impact of such corruption on other sections of society notwithstanding. But the sheer complexity of India’s political landscape means that corruption becomes ineffective in terms of achieving the result desired by the bribe giver. The Indian polity is fractured, with multiple levels of power and parallel independent institutions that often undercut each other. For instance, the previous United Progressive Alliance government’s two biggest scandals (around spectrum for mobile phones and captive coal mines for private companies) both involved allegations of large companies, domestic and multinational, paying bribes to government ministers for allocations of valuable natural resources. Both scandals resulted in those allocations being cancelled wholesale, years or decades after they had been made. As discussed in our earlier thematic briefing on expanding opportunities for corruption in India, the NDA government’s policy steps have greatly worsened this environment of arbitrary, inconsistent structures of corruption.

Secondly, the structure of the Indian polity means that political forces need to respond to multiple challenges from different forms of pressure and resistance. An attempt to make investment more attractive by, for instance, easing land transfer for greenfield industrial projects, meets with massive resistance from those being dispossessed. Such resistance defeated the NDA’s biggest policy initiative to date – the attempt to dilute the safeguards in the 2013 Land Acquisition Act. It also has resulted in many industrial projects – such as the largest proposed Foreign Direct Investment in India to date, the POSCO integrated iron ore steel plant project – being stalled until they become unviable.

None of this means that industrial development in India is impossible, as some commentators imply. Rather, it means that a focus on private capital-led, export-oriented industrialisation is likely to meet serious challenges in India’s political system.

These challenges are then compounded by serious deficiencies on three other fronts: infrastructure, education and health, and finance.

India’s infrastructural constraints are severe and so commonly known that they need little illustration. While India has some of the world’s largest and densest road and rail networks, these are aging and of poor quality. Half the road length is not even paved and only one quarter of national highways meet accepted standards. Over the past decade, most attempts at improving these networks have relied on public private partnership models, which have been expensive and produced dismal results. Ports – which are particularly important for industrial exports – are in a similarly poor condition. Out of the world’s top 50 container ports by trade, only one is in India – at the 34th position (by comparison, seven of the top 10 are in China). Electricity supply, which is vital for large-scale manufacturing, is unreliable and poor in quality, with frequent power cuts and voltage fluctuations meaning that most factories maintain their own private generators. This is expensive and inefficient.

India’s poor record in public health care and education is equally well known. The NDA government is attempting a national skill development mission to attempt to address skill deficiencies, but this is not accompanied by any concerted effort to address the problems in existing education and health care systems. (On the contrary, the opposite is occurring, with severe budget cuts in the central government’s health budget). Meanwhile, the effectiveness of the skill development mission is doubtful, as it is not reaching either the required numbers or delivering employment to its trainees.

We reiterate – these deficiencies are remediable. But addressing them requires a substantial investment of funds and political commitment. But this runs into the third obstacle: finance. Instead of expanding public spending, the government continues to primarily expect private capital to deliver the large investment required – all of its policy initiatives are premised on large-scale private participation. Smart cities are to be financed predominantly from private investment; the skill development mission is based on a public-private partnership model; large infrastructure projects like the Delhi Mumbai Infrastructure Corridor, roads and railway development also are premised on similar models. But these enormous expectations do not appear to be realistic, given that private investment in India is stagnating and most big firms are already deep in debt. Moreover, given the global situation described above, international finance is highly unlikely to invest in these long term, risky ventures, which are unlikely to see returns for a decade or more. Historically, every country that has made such large investments in infrastructure and public services has relied on the state machinery. But the inability of the Indian state to put its money where its mouth is, so to speak, reflects precisely the dangers that the Make in India project will exacerbate. We return to this problem in the conclusion.

4. The policies of Make in India

Despite the high-profile nature of the program and the launch of an official website, the exact policy contours of the Make In India initiative remain unclear. There does not appear to be an overall approach document or policy paper. Rather, the website lists a number of policies and steps being taken by various ministries. These can be broadly grouped into three categories: Measures intended to reduce regulatory paperwork; easier access to natural resources, particularly land; and large infrastructure projects, such as the Delhi Mumbai Infrastructure Corridor.

It is not clear how these policies will address the challenges discussed above. Steps to reduce paperwork may make it easier to obtain regulatory approvals, but in itself this will not make any particular investment viable, or ensure that it productively contributes to the larger economy. Moreover, as discussed above, in the absence of institutional changes, these changes are unlikely to address the deeper structural problems of Indian regulation.

Indeed, the steps the government has taken around natural resource approvals are greatly exacerbating existing tendencies towards arbitrary and non-transparent decision making (as discussed in our briefing on the subject from November 2014). While much is made of the auctions of coal mines in early 2015, those auctions themselves are questionable, and moreover did little to address the basic arbitrariness of a system that allocates land, minerals, forests and water through an ad hoc, clearance-based and non-objective system of regulation. In the name of making such approvals easier, the government has instead increased opportunities for speculative and corrupt interests to obtain clearances, since there is no transparent or publicly accountable system of assessing project proposals. This in turn is harming infrastructure development and the prospects of genuinely beneficial projects.

Finally, reflecting both of these tendencies, large infrastructure projects are not faring very well either, including those specifically named as part of the Make in India initiative. The Delhi Mumbai Infrastructure Corridor has been more than 10 years in the making (the Dedicated Freight Corridor, the heart of the new project, was initiated in 2005), but construction has yet to begin. Resistance and protests against planned roads and industrial zones within the DMIC continue to grow (see for instance here). Road construction has accelerated under the NDA but remains well below the government’s goals – from April 2014 to June 2015, 3,038 km of new roads were constructed, against a target of 6,300 km. The quality of these roads, and their relevance to the Make In India initiative, is also unknown.

In short, the challenges facing the Make In India approach of export-led industrialisation are immense, and the policies being implemented as part of this initiative do not appear to be addressing them.

5. The dangers of the Make in India approach

The entirety of the Make in India initiative, as discussed above, appears to be aimed at addressing the complaints of large private investors, particularly those from multinational enterprises, in the belief that this will lead to an increase in manufacturing aimed at global markets. This approach is unlikely to work. But more importantly, it is likely to lead to regulatory and policy decisions that will actually worsen the basic problems of the Indian economy.

The structural realities of India’s political system and domestic constraints means that foreign investment to India is already dominated by speculative investors seeking quick profits. India’s stock market’s fluctuations are hence effectively determined by the rapidly changing flows of capital from foreign institutional investors. Long term, large capital investors have tended to not come to India as a result of the phenomena described in the Internal Challenges section above. After 2008, with the collapse of the global economy, such investors are even less likely to come to India.

Designing policy around investors seeking quick, short term profits is, naturally, not likely to address India’s challenges. Rather, it will exacerbate existing institutional tendencies towards corruption and cronyism, while undercutting any attempt to bolster India’s severely underfunded health care and education systems.

The NDA government’s policymaking already shows strong signs of this occurring. The problems in its approach to decision making around natural resources were discussed above. In fiscal terms, welfare schemes have remained underfunded, while wages are stagnating. The result has been that Indians themselves continue to have low purchasing capacity, and this has not grown; indeed, since the NDA has come to power, rural consumption has stagnated. This has been a key contributing factor for declining private investment.

In short, in the name of Make in India, the NDA appears to be simultaneously promising more employment and more development for the majority, while in fact delivering the opposite. How will the political establishment square the circle of these contradictory policies? The fear is that it will turn to increased majoritarianism and sectarian politics, with dangerous consequences for the Indian polity.

But in the long run, a society like India, with a vast but very poor population and a dire need for basic services and stable employment, can only follow a model that is built around expanding the incomes of its citizens – coupled with an increase in the accountability of its institutions. Building on India’s strengths in democratic functioning, effective social spending programmes that boost purchasing power, and a vibrant public sphere can lead to an “Indian” path to development – one that would seem to require increased public investment, specific measures to increase the responsiveness and democratic character of its institutions, and measures to increase livelihood security and basic welfare. Other developing nations have already succeeded in achieving transformations in the living standards of their populations by following parts of this approach. This is far more likely to be effective than a Make in India approach.

This article was first published on the India Study Group website.