Make in India, How ?

by Harish Gupta, National Editor, Lokmat Group

Of Prime Minister Narendra Modi's characteristic one-liners, the one that got decidedly the most resonance is 'Make In India'. It has been warmly received not only at home but in the US, where Modi's current tour has been a huge draw and the liberal American opinion is in favor of fast developing India. Everybody knows India has got the right size, and the right demographics, to replay the 'China story' of three decades ago. But the persistent question is: has India got the political will to make the transition from a predominantly agrarian economy to a modern one which is sustained by manufacturing. At present, only 15 per cent of India's GDP is from manufacturing while that of South Korea is 31 per cent and, with China, it is 35 per cent. Is such a huge handicap manageable?

It is a known fact that India has a skill deficit that makes its so-called demographic dividend quite meaningless. The shortage of skilled workers—welders, plumbers, carpenters, joiners—is an operational obstacle. But far more complex is India's legacy of 'socialistic' labor laws, which became more draconian in the 1970's. The Industrial Disputes Act did the worst damage to the investment climate stipulating that any firm, employing more than 300 people, would require government permission to close down, or to retrench workers. In 1982, it was further amended to lower the threshold to 100.

The Modi administration is now keen to raise the threshold at least to its original level of 300. The Labor Ministry has suggested it in a paper now in circulation, with a palliative added that, in the event of such cessation of work, there will be a substantial rise in the retrenchment compensation. The paper also intends to bring under Contract Labor Act several new categories, like sweeping, dusting, gardening, collection and disposal of garbage and waste, and more significantly, information technology-related services. Besides, according to the paper, the Government also intends to include under the Act all SEZ's exporting 75 per cent of their production. But these are explosive political issues.

But bad labor laws are not the only problem. Equally important is the opacity in Land Acquisition Act and, what is being increasingly evident, the extortionate tendencies that some state governments are displaying whenever there are talks of new industrial investment on their turf. Environmental clearance, water supply, electricity—everything comes at a price. No wonder, therefore, that India's position is 134th on a World Bank list of 189 countries for "Ease of Doing Business". Being so low on this index, how can India offer itself as a manufacturing hub of any consequence?

It is important here to keep in mind the nature of India's business, which is essentially small. Small business accounts for 17 per cent of India's GDP and employs 60 million people. It is India's second largest occupation, after agriculture. The Small and Medium Enterprises (SME) are also 90 per cent of all industrial units of the country, producing half of India's industrial output. The SMEs' operational costs are met from bank finances, but bank interests in India are outrageously high, adding to the final costs of their products. This, together with a generally business-unfriendly milieu, is depriving India of a historic opportunity to attract from India the businesses that China has been closing down due to its rising wages. Justin Lin, a former Chief Economist of the World Bank, calculates that China will shed about 85 million manufacturing jobs in the next five years due to soaring wages. But the China jobs are increasingly moving to Malaysia and the Philippines, not India, even though the latter aims to create 100 million manufacturing jobs by 2022.

Rather than exporting jobs to India, China is destroying our jobs. Most of low value retail items, and intermediates in production processes, have seen near-total replacement by Chinese imports. A small but telling example is in Delhi's Wazirpur area where, around the factories that make steel utensil, hundreds of little workshops that used to flatten and cut utensil parts from steel sheets have closed down as Chinese factories have begun to design them on computer and use machine-polished steel to make them. The utensils coming out of the Wazirpur factories are "made in India" only in name. In reality, they are made in China.

The China syndrome has engulfed most small & medium industries of India. A walk along the G T Karnal Road from Amritsar to Agra will tell a shocking story of closed factories. They may see some light now as land acquisition has become impossible and foreigners want to set up their shop immediately. Thus closed factories have ready buyers from Gulf, China, Europe, Japan and elsewhere. They may respond to Modi's call of "Made in India". But except for land and minimal labour, there will be nothing Indian. The 300 manufacturers of pre-fabricated material in India, with an output of nearly Rs 40,000 crore, are facing extinction due to Chinese competition. The manufacturers’ plea for hike in customs’ duty on Chinese products to save the local industry has gone into deaf ears. In the coming Diwali, most of the fireworks will come from China, as usual. Even the idols are China made. And, significantly, China is grabbing the key intermediates in production chain. India is perhaps the only country where import of finished goods is cheaper than the raw material. For example, Purefied Terepthalic Acid (PTA), a crucial product for making polyester filament yarn, is imported from China to make PFA and export end product. It is but for the legendary clout of Reliance Industries Limited, India’s top PTA maker, that the North Block imposed anti-dumping duty. A look at the excise and custom duty structure under 120 says of Modi dispensation will be a case study.

China’s Silent War 

is killing the Indian

 manufacturing.

Modi’s ambition to lead India on the path of manufacturing is justified, as no society can progress, intellectually and economically, without an industrial base which alone, in its turn, supports a stable middle class. But the task is not easy. It calls for a domestic policy that encourages investment, provides finances at low interest rates and a trade policy strong enough to resist the onslaught of a neighbor bent upon de-industrializing India. Its time, action is seen on the ground.

(The author is National Editor, Lokmat group)