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Is Modi Making in India?

In this article N Chandra Mohan, an economics and business commentator, writes that Prime Minister Narendra Modi's ' Make in India' economic programme is inspired by the East Asian manufacturing exported success story of development. However, whether he succeeded in doing so is far from obvious. East Asian countries succeeded when global trade was booming. Can a similar outward-oriented strategy get going now when global trade winds are adverse as they were in the 1930s?

N Chandra Mohan

New Delhi, Sep 12 2015 (IPS) - Prime Minister Narendra Modi’s ‘Make in India’ programme is inspired by the East Asian manufacturing export success story of development. Earlier, when he was chief minister of the state of Gujarat, he expressed an ambition of modeling the state on South Korea.

Whether he succeeded in doing so is far from obvious. Now, as Prime Minister of India from May 2014, whether he can replicate the success story of South Korea and China at the national level, is equally far from obvious. East Asian countries succeeded when global trade was booming. Can a similar outward-oriented strategy get going now when global trade winds are adverse as they were in the 1930s?

The world economy is likely to grow by 3.3 percent this year, not far from the rough rule of thumb indicating a recession. Only 63-odd countries are set to grow by four percent or more ! Half of these are in Africa and close to a third are in Asia.

The advanced countries are afflicted by secular stagnation. This is an extremely uncertain environment to launch an export drive. As the world economy cannot accommodate another export-led China, India’s central bank governor Raghuram Rajan suggested ‘Make in India’ ought to be re-oriented to ‘Make for India’, that is more dependent on the vast domestic market than relying on incentivized exports alone!

The Prime Minister flagged off ‘Make in India’ in his extempore Independence Day address from the ramparts of the Red Fort on August 15, 2014. He openly welcomed foreign investors to come and set up facilities in this country and talked of encouraging export-oriented manufacturing.

The National Democratic Alliance (NDA) government, in its maiden budget, also indicated a desire to attract big-ticket foreign direct investment in infrastructure like railways, power and highways. Modi has expressed a vsion of building a diamond quadrilateral of bullet trains connecting major metropolises on the Tokaido Shinkansen model and dedicated industrial corridors.

Does this add up to an East Asian model? Not quite.

The South Korea miracle did not happen democratically, but under strong-arm dictators. And the State played a huge role in providing cheap credit to South Korean big business.

More importantly, there are preconditions at the level of human development that do not obtain in India. Forget the poor track-record on Millennium Development Goals (MDGs).

Before take-off, South Korea saw huge investments in education that improved literacy and schooling. Land reforms were in place to ensure unlimited labour to work in the export units.

As the bulk of India’s workforce has low levels of education or none at all, can it attempt this trajectory?

Modi, for his part, wants to boost the manufacturing sector in a big way and make India a global hub. The previous United Progressive Alliance (UPA) government also sought to improve the competitiveness of manufacturing, but was a miserable failure.

The share of manufacturing in the nation’s output of goods and services has stagnated at 15-16 percent. The ground for serious concern is that this sector is not absorbing the millions who stream out from the farms and head to towns and cities for work. Neither can the services sector, for that matter. There is no alternative to taking up casual and temporary jobs in the vast low-paying informal sector.

What has been the response to ‘Make in India’? In the nine months since it was formally launched, the ones most enthusiastic about it are investors from East Asian countries like Japan, South Korea and China! Japan’s Softbank, India’s Bharti Enterprises and Taiwan-based Foxconn announced a joint venture to invest 20 billion dollars in renewal energy projects.

Foxconn, the world’s largest contract manufacturer, is also scouting locales to set up 10-12 facilities in India by 2020 according to its chairmanTerry Gou and has announced plans to invest five billion dollars in Maharashtra. China’s smartphone giant Xiaomi has launched its made-in-India handset.

The foreign investor response is most discernible in automobiles. South Korea’s auto giant Hyundai Motor Co. is considering a third auto plant after Modi’s visit to that country to pitch for foreign direct investment to boost local production.

Mercedes Benz is doubling its assembly capacity to 20,000 units. Ford is planning to ship its India-made EcoSport to the US in October 2017. The leader, Maruti Suzuki India Ltd, is building its third factory in Gujarat. Addressing auto component suppliers, Suzuki’s chairman, Osamu Suzuki, suggested that Make in India should really be a Quality in India programme! Honda Motor Co, too, is expanding one of its plants.

Auto India has acquired critical size with the presence of most global auto giants and strong domestic players. This has, in turn, catalysed a thriving auto component industry. Domestic players, including component manufacturers, have forayed abroad and acquire prestigious brands like Jaguar Land Rover and Ssangyong. While the market for small cars is booming, it is interesting that even Audi and Daimler Benz are witnessing bullish sales. India is already a base for the global plans of Japanese motorcycle manufacturers.

However, foreign direct investment alone cannot make this flagship programme work as it constitutes only a miniscule 3.9 percent of fixed investments in plant and equipment. It needs the full-fledged participation of India Inc, leading segments of which prefer to invest more outside than domestically. The 16 billion dollars auto giant Mahindra prefers to incubate its latest offering, the GenZe electric scooter, entirely in the US!

The warrant for an all-American product is that “we really felt that India didn’t have the start-up atmosphere…” stated Anand Mahindra, chairman, in a candidd interview to the Financial Times.

Mahindra’s move forcefully underscores the challenges prime minister Modi faces in pushing for ‘Make in India’. There must be broader agreement on what it means. Is ‘Make in India’ compatible with design, manufacturing and assembly being done elsewhere in the world in a supply chain-driven globalized economy?

To incentivize India Inc, the NDA government also must cut red tape and radically improve the conditions for doing business. Above all, raising the threshold levels of human development is imperative to kick-start manufacturing in the country. This path need not be an East Asian one but one Made in India.

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