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Riding The Good Wave

Despite recessionary conditions and weakening of international demand, Make in India 2.0 has been showing good results on the ground

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Come, Make In India. Come, manufacture in India; sell in any country of the world but manufacture here. We have got the skills, talent, discipline, and determination… From electrical to electronics, from chemicals to pharmaceuticals, from automobiles to agro value additions, from paper or plastic, from satellite or submarine, come, make in India.”

This is the almost poetic exhortation that Prime Minister Narendra Modi made from the Red Fort in his maiden Independence Day speech in 2014. He has been delivering the same message to industry captains, both here and abroad.

The Make-in-India campaign, kicked off on 25 September, 2014, was devised to make India a manufacturing hub, push the manufacturing sector’s share to 25 per cent of gross domestic product by 2025 from the current stagnant 17 per cent and to make the manufacturing industry worth $1 trillion, a decade from now.

The object is clear — to create millions of jobs in an under-employed nation, jumpstart consumption, make India an integral part of the global supply chain, and lead the country to the path of double-digit growth in the coming years.

Says Confederation of Indian Industry (CII) president Sumit Mazumder: “It was one of the most powerful ideas ever to have been launched in Independent India.”

What’s Behind The Slogan
To be fair, this is not for the first time the government is pushing a Make in India drive. Immediately after Independence, public-sector units powered the first “Make in India” movement. After the 1991 opening of the economy, private enterprises led the phase two of the “Make in India” movement. The Modi government’s new thrust on the manufacturing sector, in a way, thus, is the third wave of the ‘Make in India’ movement.

With employment not picking up and a million heads being added to the Indian workforce every year, and the services having bypassed the manufacturing sector, the government was forced to rejig its priorities and focus on labour-intensive, low-cost manufacturing plans, when the world is talking about a fourth industrial revolution.

“We are reaping the benefits of the demographic dividend. If jobs don’t increase commensurate with the growing numbers of the working population, which is what the ramping up of the manufacturing sector would do, there could be unrest,” says Mazumder.

This massive manufacturing push is expected to create 100 million more jobs for India’s youth by 2022. Former Planning Commission member Arun Maira says that Modi’s new thrust on “Make in India” is consistent with the erstwhile Planning Commission’s similar proposal “which was not pushed by the previous UPA government”. Certifying the Modi programme, Maira adds: “We need to create jobs. Manufacturing is the right way to go about it.”

Tackling Over-regulation
Logically, the first step was to introduce a slew of measures that made both starting and doing business in India easier. The slogan ‘Ease of doing business’ was coined by the Prime Minister and was followed up by liberalising the foreign direct investment (FDI) regime. The target set was to place India among the top 50 countries in the next three years in terms of ease of doing business.

Some significant steps have been taken. The new regime now says no minimum capital, no common seal, and no declaration of commencement of business are required to begin operations. Documents for exports and imports have been reduced from 11 to 3. More than half of the defence items (56 per cent) are taken out of licensing requirement. Twenty central government services are linked to the eBiz portal — mandated to function as a single-window portal for clearances from various government agencies.

The FDI regime too has been liberalised. For instance, FDI in defence industry is permitted through the government route up to 49 per cent. Higher FDI can be allowed on case-to-case basis. FDI in construction, and operation and maintenance of identified railway transport infrastructure up to 100 per cent is permitted through the automatic route. FDI in the insurance sector has been raised from 26 to 49 per cent. The norms for FDI in real estate projects have been further liberalised. FDI up to 100 per cent under the automatic route both for green field and brown field projects for manufacturing of defined medical devices has been allowed.

Commerce ministry officials said that “25-30 cabinet notes resulting in such far-reaching changes in the last few months” showed that the Narendra Modi government worked at a speed “unheard of in this country”. The campaign has its other arms too — ‘Skill India’, ‘Digital India’, and ‘Smart Cities Mission’ are all part of the groundwork to get Make in India ticking.

Make In India 2.0
In the second year of its existence, the ‘Make in India’ programme moved from setting up a liberal regulatory regime to launching actual measures and removing glitches that slowed the pace of growth. For instance, the skill ministry was recently asked by the PMO to open 7,000 new industrial training institutes — half the total number of ITIs opened across the country since Independence — in the next one year.

‘Startup India’ was meant to be another slogan to provide a boost to startups with a new venture fund and easier registration norms. Modi realised the potential of this ecosystem early on. In the US, 70 per cent of jobs are being created by startups, and as many as 30 per cent startups in the US are promoted and created by Indians. According to NASSCOM, 72 per cent of founders in India are less than 35 years old, making the country the world’s youngest ‘startup’ nation.
In raising funds, Indian startups have had an impressive 2015. In just one year, Paytm raised $805 million, Flipkart $700 million, Snapdeal $500 million, and Grofers $168 million. The e-commerce industry, driven largely by startups, is expected to cross $38 billion in 2016 — a jump of 67 per cent over the last year — and 65 per cent of total sales would be generated by mobile devices and tablets.

The challenge now, as Department of Industrial Policy and Promotion (DIPP) secretary Amitabh Kant says, is to become the “most disruptive nation” in the world. There is little denying that something is working. India jumped 12 places on the ease of doing business 2016 index, released annually by the World Bank.

Significantly, the ‘movement’ is now getting a boost with the states wanting to compete as business destinations; and they are adding a local flavour to the central campaign. For instance, Andhra Pradesh wants to be known for its “Make in Andhra” expertise.

The central government is in sync and sees the need for “a clutch of leader states” powering India to a double-digit growth. States like Andhra Pradesh, Karnataka, Maharashtra, Gujarat, Jharkhand, Madhya Pradesh and Chhattisgarh, are typically positioned to become manufacturing hubs in their own right. A good example is Maharashtra holding a ‘Make in India’ week in Mumbai, which is witnessing participation from over 60 countries and over 1,000 companies.

Performance So Far
The renewed thrust has yielded some dividends on the ground too. Union commerce and industry minister Nirmala Sitharaman recently announced that the FDI inflow in India is growing at 48 per cent when globally there is a fall of 16 per cent. One must mention that global infractions in oil and other commodities have deeply dented commodity exporters such as Brazil and South Africa as investment destinations, making India’s case stronger.

Make in India has proportionately benefited with a record FDI Inflow growth of 114 per cent in December last year, and seven of 10 top sectors receiving FDI relate to manufacturing. RBI data on FDI inflow show that the country received as much as $63 billion till November 2015, 21 per cent higher than the FDI inflow in the previous 15 months.

“FDI will grow by 40 to 45 per cent in 2016 despite the global slowdown, largely owing to the number of policy measures taken by the government,” says DIPP secretary Amitabh Kant.

Whether it was international agencies or rating agencies or even Ivy League institutions, there was consensus that India is “a happening country”. It is the first among world’s fastest growing economies; it is also the first choice for tech companies to set up research and development facilities outside their homes. Among the BRICS nations, “it’s only India that is shining”. India moved up 16 places on the World Competitive Index 2015-16.

Commerce ministry mandarins say that “over 17,000 investor queries” had been made through the Make in India portal, quite a feat in this depressing global environment.

Among major commitments to have been made by global majors was Foxconn which expressed its intention to invest $5 billion in India. Other significant commitments were made by Xiaomi, Cisco, LG, BrightSKY, Philips, Thomson, Samsung, LG, Flextronics and Quanta.

In the first major FDI in rail projects after the limit was raised, General Electric and Alstom bagged $5.6 billion contract from the Railways to build locomotives in the country. Defence ministry officials say that they have a highly-ambitious target to “achieve a level of 70 per cent indigenisation by 2027”.

A number of companies including majors such as Dassault, Boeing and Airbus have announced major plans. Dassault Aviation bagged an order for 36 Rafale fighter aircraft. Pipavav Defence announced its intention to develop India’s first ‘smart city’ for the defence sector at an estimated cost of $1 billion in Maharashtra.

Airbus has announced restructuring of its organisation in India and said that Airbus exports will reach $2 billion from India. Boeing has entered into a joint venture with Tata Advanced Systems and the partners formally announced that a centre to manufacture aero structures for AH-64 Apache helicopter will be developed in Hyderabad.

In the retail space, IKEA announced its plan to open 25 stores across India, entailing an outlay of Rs 12,500 crore. Other developments included entry and expansion by global majors such as GAP (which opened its flagship store in Delhi in May 2015, and currently has four stores);the H&M group, which plans to invest Rs 720 crore in India, announced 50 single brand retail outlets across India in the next few years; and Walmart India, a wholly owned subsidiary of Walmart Stores Inc., plans to open 500 stores in India in the next 10–15 years.

The retail sector accounts for over 10 per cent of the country’s GDP and around 8 per cent of employment.

In the automobile sector, capacity expansions announcements were made by Bajaj Auto, MRF, Apollo Tyres, Volvo India (which also uses its plant as an export hub for buses), TVS, Amara Raja; R&D centres by Ford and Piaggio; greenfield projects by Fiat (JV with Tata), CEAT, Daimler-Benz, International Tractors and increased localisation by Mercedes-Benz and BMW. Though the slowdown in the auto industry is a matter of concern, these initiatives are significant considering the sector accounts for 7 per cent of India’s GDP, and provides 19 million jobs.

Clean energy, on the other hand, is expected to yield business worth $160 billion in India in the next five years. Significant announcements included Softbank, Foxconn and Bharti Enterprises pledging to invest about $20 billion in solar projects in India. Several private companies including the Welspun Group, Adani Enterprises and the Essel Group have begun building large new solar plants, while Reliance Power has commissioned the largest solar plant in the world, with a 100 mw capacity in Rajasthan. Mytrah has plans to invest around $400 million next year while Gamesa has plans to invest close to $220 million over the next two years.

All Is Not Hunky Dory
There is the other side too. The Congress-led Opposition has mounted a major attack on the government claiming the Make in India campaign is designed purely to aid a bunch of crony capitalists and ignores the wider issues the nation faces. Congress vice-president Rahul Gandhi says that the programme in its present form has neglected “the smaller and medium enterprises, with the focus on a handful of big corporations”.

Former commerce minister and senior Congress leader Anand Sharma alleges that the Modi government’s programme was a rehash of the Manmohan Singh government’s 2011 manufacturing policy.

Former Planning Commission member Abhijit Sen wonders if the Make in India programme was working on the ground, and says that its template and slogan could be changed to market India as a better destination for profits “because other places including China are not that attractive now”.

Internally, BJP ministers have been blaming the bureaucracy for both indifference and sabotage. Union minister Nitin Gadkari says the bureaucracy’s attitude was the biggest hurdle in infrastructure expansion. Maira agrees that the bureaucracy has to be sensitised on further facilitating ease of doing business, particularly in states.

Government expenditure on R&D remains a paltry 0.8 per cent of GDP, and CII’s Mazumder agrees that this needs urgent attention. A joint report of the Boston Consulting Group and CII recently said that the target of creating 100 million jobs and achieving 25 per cent of GDP from manufacturing by 2022 may be difficult, going by the performance of the manufacturing sector in the past few months.

Perhaps the biggest challenge is the slowdown in industrial activity marked by poor corporate third quarter results and the lack of orders from global markets now teetering on the verge of recession. Companies hit by poor demand are in a mode of consolidation and lowering risks in preference to investment and expansion. Many of the companies that had shown profits were those that had benefitted from lower energy costs rather than expansion of sales. Backbone sectors like steel took the biggest hit. Tata Steel booked a third quarter loss of Rs 2,127 crore in the face of dumping by Chinese companies while Korean giant Posco, which once planned to invest $12 billion in India, has virtually withdrawn from the country.

RBI’s recent February report on the economy noted that in the first two months of the December quarter, industrial activity slowed in relation to the preceding quarter. This reflected weak investment demand with deceleration of capital goods production. Stalled projects continue to remain high, and there is a decline in new investment initiatives.

These challenges notwithstanding, the new “manufacturing” opportunities may be India’s chance to cement its position as the only bright spot in the global economy.

As Mazumder puts it: “With the possible exception of Singapore, no nation has become an advanced nation without riding a manufacturing wave.”

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