‘Make in India’ a work in progress
Author: Aasheerwad Dwivedi, University of Delhi
Historical experience presents “structural transformation” as a necessary condition for achieving high economic growth in any country. The typical transformation path involves people moving from agriculture to industries to services, from low productivity to high productivity sectors, and from villages to cities. Much to the chagrin of millions, India missed the bus in the 1960s and, unlike its eastern neighbors like China, went its own atypical way.
India’s latest attempt to move up the value chain is the ‘Made in India‘ launched in 2014, which focuses on building world-class infrastructure, cutting red tape, promoting innovation-friendly policies and improving the ease of doing business. His timing was apparently perfect amid trade opportunities ostensibly created by deteriorating China-US trade relations.
Seven years after its introduction, the euphoria is weak. The share of the manufacturing sector in India’s GDP is only 15%, although the initiative aims for 25% by 2022. The growth rate of the manufacturing sector has averaged 4.5% from 2014 to 2021 , meaning the program is also unable to provide the 100 million manufacturing jobs. promised by policy makers. Although FDI has doubled since 2014 (US$81.72 billion in 2020-2021), most investments have gone into services and software or hardware.
Indian exports have fallen from US$310 billion in 2014 to just US$313 billion in 2020, with their composition largely unchanged. The EU-28 remains India’s main export destination, followed by the United States and other Asian countries (together accounting for one-third of total exports).
Although it did not produce significant results on the commercial front, the program was successful in attracting investment in mobile manufacturing, automobiles and pharmaceuticals. Global brands such as Samsung, Hitachi, Kia, Apple and PSA have started manufacturing in India, with India’s share of smartphone manufacturing doubling from 10% to 20% between 2017 and 2020.
To give further impetus to the “Make in India” initiative, a “Production Linked Incentive” was introduced in March 2020 to improve local supply chains and stimulate investment in high-tech production. To increase economies of scale, the government subsidizes manufacturers to invest in technology and supply chain improvements if they produce above a certain threshold.
The program covers 13 sectors, including pharmaceuticals, mobile phones, automotive components and textiles, with a total expenditure of $26.48 billion. Since the program aims to make domestic producers competitive and reduce reliance on imports, it is tailor-made for a post-COVID-19 world in which the benefits of a diverse manufacturing base are magnified.
Yet the obstacles to government-led manufacturing lie in policy incoherence and poor sector targeting. Once the state provides protection, it is difficult to withdraw and difficult to discern what will happen in the absence of protection. India’s protectionist past bears witness to this difficult balancing act.
While the Indian government has put in place export promotion policies, trade policy is more inward looking. The “Make in India” initiative ignores the decades-long geographic fragmentation of the global production process, a reality that increases the dependence of exports on imports. The correlation between Indian imports and exports in the post-reform period stands at 0.75. Export growth requires greater integration of India into global value chains – a feat achieved by China and Vietnam, where there is 40% foreign value added in apparel exports.
India’s average MFN tariff fell from 125% to 13% between 1991 and 2014, then fell from 13% to 18% from 2014 to 2018. This domestic outlook can be explained by India’s signature of 11 free trade agreements between 2004 and 2014 – but nothing since. India has not joined the Regional Comprehensive Economic Partnership (RCEP), but is actively consulting the UK on a free trade deal and is in advanced trade talks with Australia, the United Arab Emirates and Canada.
While it is too early to draw firm conclusions on the production-linked incentive regime, an initial assessment indicates that it suffers from poor targeting. There is huge potential for increased labor-intensive exports in India, but only three of the thirteen sectors targeted by the program – automobiles and automotive components, mobile manufacturing and textile products – are labor-intensive. -work. India’s share of low-skilled exports is around 15% lower than its share of the labor force (compared to equality in Bangladesh and Vietnam), so the program should have focused more on labour-intensive sectors.
India has been following an active government-led reform agenda over the past few years, with impressive progress in physical infrastructure as well as improved delivery of public services through digital infrastructure. Still, the first chapter of government-led manufacturing reform looks bleak, and India’s quest for progress in manufacturing should be described as a work in progress at best.
Aasheerwad Dwivedi is an assistant professor at the Shri Ram College of Commerce, University of Delhi and a consultant at the Center for Social and Economic Progress, New Delhi.