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8/21/2017 Unless Urgent Steps Are Taken, Make in India Will Remain a Non-Starter - The Wire

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ECONOMY

Unless Urgent Steps


Are Taken, Make in
India Will Remain a
Non-Starter
BY AJAY BAGGA ON 08/02/2016 3 COMMENTS

File picture of National Workshop on Make in India. Credit: Narendra Modi on Flickr

The Make In India campaign was launched with the twin objectives
of growing the share of manufacturing in Indias GDP and of
generating massive employment opportunities for Indias teeming
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young population. The vision, articulated in September 2014, was


timely, following on the success of the Indian Mars Mission. A total of
25 sectors were identified to target these objectives.

In the last 16 months what has been the success of this initiative? With
the Make In India week being launched on Feb 13 by the
Prime Minister, it is a good time to take stock of the policy outcomes,
especially the on the ground success or failure of this vision.

Indias economic success is critical, in a world marked by


increasing economic distress caused by falling commodity prices,
deflation, currency wars, increasing protectionism and reducing global
trade. India stands out as a beacon of hope that democratic political
systems can also deliver high economic growth. The promise of BRICS
has been dampened with the economic problems in Brazil, Russia and
South Africa and the slowdown in China to a 25-year low rate of GDP
growth.

As oil prices have crashed from USD 115 in June 2014 to USD 30
in January 2016, there is a huge transfer of wealth happening from
oil producers to oil consumers. Some economists are questioning why
this fall in oil import prices has not lead to a huge upsurge in
Indian economic growth. The explanation is in the details. The average
pump prices in India have fallen by 11% for Petrol and 21% for Diesel,
while crude prices have fallen by 74%. The difference has been
largely pocketed by the federal government in the form of enhanced tax
levies which have led to a massive year-on-year growth of 34% in
indirect tax collections.

This is fiscal prudence and has led to a situation where


corporate turnovers are stagnant or reducing, while margins are
expanding, leading to better profits for commodity consumer sectors.
Our estimates are that CPI would be lower by 0.3% if the entire fall
in global crude prices gets transmitted to the Indian
commodity consumer sectors.

Any analysis of the Make In India initiative has to be thus put in


a historical context. The election of the new federal government, with
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the first clear mandate in terms of a single party majority in the


parliament in decades, raised hopes and expectations of a strong willed
administration, which would introduce structural reforms and lead
India onto the path of double digit growth
for multiple decades.

High expectations

The slogan of Minimum Government, Maximum Governance


charmed analysts and industrialists alike. Expectations were that it
would be a right-of-centre, liberal government, which would favour
rapid privatisation and pro-growth policies to kick start the economy
and revive aggregate demand which was languishing.

The World Banks Ease of Doing Business ranking of India improved


12 places to reach 130 out of a list of 189. However, there was precious
little progress in making it easier to start a business, to get permissions
for capacity expansion, to shut down a business or to enforce a
contract. On top of that, the stalling of crucial reforms like GST and
Land acquisition was a sobering reality.

What analysts missed was that, beyond the Make In India campaign,
this was a strange mix of promised right wing liberalism with heavy
doses of welfare statism. While India was celebrating being 130 out of
189 in the Ease of Doing Business rank, China at 84 and even Pakistan
with all its failed state syndrome at 138,were a sobering reminder of the
gap that needed to be bridged. Mexico at 38, Russia at 51, Turkey at 55,
South Africa at 73, Philippines at 103, Indonesia at 109 and Brazil at 116
should give us further food for thought.

So what were the limitations of the approach and the


execution? Privately a lot of industrialists say that what was needed was
a 15-month revival plan, apart from the 15-year strategic plan that
was rolled out with great panache and confidence.

First of all, there was little attempt to institutionally strengthen the


policy framework. A technical expert, working on an inter-ministry
committee to remove the bottlenecks of stalled projects, mentioned how
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the bureaucrats were aghast at the pace at which he wanted to


restructure and revitalise stalled projects. In fact in the last quarter of
2015, the value and number of stalled projects actually went up. On
the other hand, despite repeated attempts at selling non-core assets
and monetising assets, many highly indebted companies surprisingly
saw an increase in their debt levels with few revivals of stalled
and bleeding projects coming through.

Talent shortage

Secondly, there is a serious talent shortage in critical areas. Institution


building and their strengthening is the need of the hour with technical
experts needed in all the mission-critical areas. This was not done
beyond some instances like getting external professionals to head some
Public Sector companies.

The result? As of January 2016, all 57 listed Public Sector


companies (PSUs) on the Indian stock market have a market
capitalisation less than that of the top 5 privately owned companies. The
market value of these PSUs has fallen over 40% in the last two and a
half years. With no bureaucrat tasked with a goal based on increase in
market values of PSUs, we have seen value destruction on a massive
scale.

This became the most evident in the Banking sector. PSU


banks contribute over 70% of the lending and deposits to the Indian
economy. However, with a substantial erosion in their valuations, as of
January 2016, all the PSU banks put together were valued less than the
leading privately owned bank. Even more starkly, all the PSU banks
excluding the SBI were valued less than the second biggest private
bank. A year earlier, in January 2015, all the PSU banks were valued at
close to two times the top private bank.

The reasons for the sharp value erosion in PSU banks will take
a separate paper to analyse. The PJ Nayak report laid out a very
good improvement plan for PSU Bank governance and performance
enhancement. Most of its suggestions are still not implemented. In the

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meantime, fears around the actual vs reported levels of bad loans at


PSU banks saw their valuations dive to historically low levels.

Highly leveraged corporates

This leads us to the fourth reason for the slow traction of Make In India.
Highly leveraged corporate balance sheets, with many sectors having
unmanageable levels of debt, which cannot be serviced by the present
cash flows. This has set in place a vicious circle of increasing bad loans,
which leads banks to curtail further credit, thus choking these sectors
off sustenance and leading to their failure. Add to that bad project
appraisals and optimistic loan disbursals based on over optimistic
forecasts by delusional or lumpen promoters, and we have a stage
where anything from 10% to 17% of all bank loans is deemed as
stressed by analysts.

Then there is the global overcapacity in certain sectors and the currency
devaluations in emerging markets. This lead to certain countries
dumping goods at huge discounts to domestic manufacturing costs.
From steel to tyres, from power plants to toys, Indian industry has faced
this dumping of goods from various countries. The
government response has been slow and mostly inadequate. This has
exacerbated the already tough conditions, with the output gap in the
economy rising, as capacity utilisation has been falling.

The comparison with China and certain pronouncements, that


the slowdown in China represented a great opportunity for India to
seize on, have been, frankly, difficult to understand. Starting from a
GDP of USD 2 trillion, even if India grows at 8 %, and China grows at
6% from a current GDP of USD 10 trillion, by 2020, China would have
added two Indias to its GDP. In this context, the talk of the China vs
India rivalry is a no-contest on most fronts.

In infrastructure, support to local manufacturing, speed of policy


implementation, scale of economic
clout, foreign exchange reserves, current account surplus, financial
assets size, military might, geopolitical influence, literacy, health,
life expectancy and even in sports (2012 Olympic medal count: China,
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88; India, 6) it will be an unequal competition for decades. This


reality check is clear to Indian industry, but seems to be missing in
the public discourse and strategy formulation.

Let us however consider the glass half full analogy and look at strong
policy action that can revive, revitalize and strongly grow the scale of
Indian manufacturing.

How can this be done? Can we Make In India? Yes.

With a 15% manufacturing share in a USD 2 trillion economy and


a non-gold, non-oil import bill of USD 300 billion, the potential
is there.

Some key success factors are in place: a federal government committed


to increasing the share of manufacturing over the next 10 years to 25 %
in the GDP and to creating 100 million new manufacturing jobs; a
competitive race amongst state governments to attract investments in
their regions to generate employment and prosperity; Indias natural
advantage of demographics, resources and established rule of law and
protection of private property rights. The government could take some
concrete steps to rapidly scale up manufacturing.

It could appoint a minister of Make In India: This project is too


important and too critical for poverty elimination in India to leave it to
bureaucrats spread across ministries. Such a minister, of the calibre
of someone like Ratan Tata should be appointed post-haste and
given the best team of bureaucrats and technocrats.

For each of the 25 sectors/industries identified for Make In India, the


Niti Aayog should appoint an industry veteran to give an action plan
within the next 100 days on which country, which region,
which companies in the world delivered the maximum excellence in
that particular industry and how. For example, Bangladesh, despite an
Ease of Doing Business rank of 174 is exporting as much textiles as
India.

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There are 10 criteria used in the Ease of Doing Business ranking by the
World Bank, among them: Starting a Business, Dealing with
Construction Permits, Getting Electricity, Registering Property, Paying
Taxes, Enforcing Contracts etc. There should be therefore
10 departments in the Ministry of Make in India mirroring these with
the task of bringing India to the first rank on all these parameters
within the next 12 months. Nothing less will do.

Infrastructure bottleneck

Infrastructure is the next biggest bottleneck. This will take a lot of time
and resources to resolve. The biggest bottleneck is infrastructure
funding and project revival/clearance. An Infrastructure Finance
Commission should be set up with a renowned finance leader like
Deepak Parekh to devise various structures and instruments to deliver
the massive fund raising that is required to get Indian infrastructure
to global levels.

India is sitting on a demographic time bomb as most of the


youth entering the work force every year are not employable.The
education system needs to be urgently revamped into a Germany-like
apprentice system which provides vocational skills to students to
create employability amongst school and college students .This is a
very critical pre-requisite as well.

The very poor sub-12% Tax to GDP ratio of India remains one of
the lowest in the world. The reasons and remedies of this are many and
the Finance Ministry needs to bring in an intense focus on this. The
tax procedures remain stuck in a colonial, guilty till proved
innocent mind-set with horror stories like the MAT demands on
foreign institutional investors without permanent establishments in
India and the retrospective demands on many large M&A deals doing
significant damage to investor sentiment and to Indias attractiveness as
an investment destination. This needs to be addressed with a 100 -
day plan; we cannot have a 15 year plan on this.

Structural reforms needed

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Structural reforms can still move ahead despite legislative delays.


Chandrababu Naidu in Andhra Pradesh and the Gujarat
government have evolved equitable and speedy land acquisition policies
that need to be emulated by all states. Similarly certain states have
moved fast on labour reforms. The Bankruptcy Act will get passed in the
next few months and will help immensely.

The creation of a single Indian Common Market as well as


implementation of GST are critical as well. These by themselves could
boost the GDP, enhance the Ease of Doing Business and significantly
increase tax compliance and collections while reducing compliance
costs for corporates. Both need to be implemented in whatever form is
politically possible, given the legislative composition at present.

Banking sectors reforms and bank balance sheet-strengthening is


an essential condition for the success of Make In India. PSU banks
need to be capitalised. Distressed loans should be moved to a bad
bank manned by Enforcement Directorate officers with empowerment
to recover defaulted loans from promoters. This will reward efficient
promoters with lower loan rates and instill fear in chronic defaulters
who have diverted funds with impunity.

This is a partial list, as the opportunity is huge. For each of the


25 sectors identified under Make In India, the 10 criteria under Ease
of Doing Business make for 250 broad action points with hundreds of
detailed action points within these. There are shining examples
of success around the world that need to be emulated and
quickly implemented in India for each of the sectors and criteria.

The Indian economy has been more of a tortoise than a lion over
the last many decades. The dice is loaded against India to deliver on
the Make In India promise. Between 2000 and 2010, the developed
world, represented by North America, Europe and Japan lost 17 million
jobs in manufacturing. These would be due to productivity gains,
downsizing and offshoring. In this scenario, India will find it tough to
add even a fraction of the ambitious 100 million manufacturing jobs
that are aimed for under the Make In India campaign.

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Global manufacturing is changing very fast. Innovations in technology,


work flows, materials, processes, automation, robotics and even in
consumption patterns means that the 20th century models
of manufacturing success will not work in the 21st century. India
has been left behind in this race and we are in an intense catch
up phase to survive and prosper.

Make In India represents a significant opportunity to deliver a


higher standard of living and ultimately prosperity to the average
Indian citizen. Speed, deep insights, micro level execution on many
fronts and far sightedness in the political class along with flexibility
and competence of the iron cage of the bureaucracy will determine if
the lumbering Indian tortoise remains in the ranks of the
missed opportunities nations or metamorphoses into a powerful lion on
the global stage.

Ajay Bagga is a market analyst based in Mumbai

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anisha joshi 2 years ago


An amazing and equally informative article Sir. I loved reading it.
Make in India initiative provides a hope because it is the crucial factor
to decide whether the youth bulge of our population pattern, will be a
demographic opportunity or threat.
Reply Share

Hemen Parekh 2 years ago


Make In India Week

This will be celebrated in Mumbai between Feb 13-18 , 2016

Following are expected to participate :

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* 60 Countries

* 5,000 Foreign Delegates / 8,000 Indian Delegates

* 190 Companies

* 4 Heads of States

* 12 Chief Ministers of Indian States

* 17 Indian States

* 13 Union Ministers

MOUs worth Rs 4 Lakh*Crores are expected to be signed


see more

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ashok759 2 years ago


Make in India is a long term endeavour. The Indian economy, not just
a few sectors like IT, has to become globally competitive, never mind
whether the products are consumed locally or exported. That requires

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