Has ‘Make In India’ failed?
A Decade Later, India Still Awaits Its Factory Revolution
- By Timothy Chummar
When ‘Make In India’ was launched in 2014, it was touted to supposedly be the economic move of the century or in the words of the prime minister at the time, “Go and sell anywhere in the world, but manufacture [it] in India.”
But fast forward a decade later, multiple critics have seriously questioned the effectiveness of this program with the initiative quietly receiving a vague mention on the BJP’s election manifesto last year.
So, what’s really going on? Why has ‘Make In India’ largely failed, what structural changes do we have to make to the Indian governance system, and how can we plug the outflows before it’s too late? That’s what this article is about.
In simple terms, the concept is this: India wants to manufacture a lot of stuff (just like China) and then export it to the world. To kickstart that, the current government created the ‘Make In India’ initiative to incentivize foreign companies to start production in India.
You see, many companies want to leave China due to sanctions, repression, and government interference. Ideally, the next logical step should be India with a laissez-faire approach to the market, attractive tax benefits, and a skilled workforce. Then why is India losing out?
Well, it’s not that simple. You see, anything related to economics and politics (especially when both are intertwined) has more nuance than a headline in the New York Times.
First off, here’s some numbers to give us some context. In FY24, India’s manufacturing industry increased by 5.5%, which seems brilliant on paper, but is it? Let’s look at the 6 major promises this policy promised to deliver on and see if they worked out:
1) Reducing imports as a % of GDP: They’ve achieved that but slightly (25.95% 23.96% in a decade).
2) Annual manufacturing growth rate: The target was 12-14% p.a., but only in one year in the last decade have we achieved this (2015), and it was even negative in 2019 (-2.4%).
3) % of sector as compared to the GDP: The target was 25%, but it remained stagnant at 15-17%.
4) Trade deficit: Even though exports have doubled over a decade, our deficit has reached -$54.5B, which is way worse than when we started.
5) FDI: Our net FDI (foreign direct investment inflows - outflows) has gone from $33B to nearly ~$25.5B, with FDI outflows climbing to nearly $44.5B.
6) Exports (share of global markets): It’s an abysmal 1.5%.
Anyone who looks at the statistics might argue that ‘Make In India’ has failed to a large extent, and I agree. Except in industries such as infrastructure, we have been found wanting in the manufacturing sector, especially when compared to our direct competitors like Vietnam. But this raises a paradox: why not India?
Here’s my take on this: it’s not a political issue. We tend to become partisan in situations like these, especially during elections. But, as a non-biased Indian, I look at it as a structural problem that has haunted India ever since its independence. If we don’t fix that, we can only blame ourselves for the failure of bureaucracy.
Let’s start with that in mind. First of all, why should we focus on manufacturing?
Firstly, you have to understand the Indian economy. At a low level, India is a service-based economy, and these kinds of jobs require specialized skills (which is why workers at these industries are termed as skilled/semi-skilled workers). IT and financial services fall under this belt, but very few people as you can imagine work in these industries (in India’s case, only 5M people work in the IT industry). But manufacturing has the possibility of providing jobs to all three types of labor (skilled, semi-skilled, and un-skilled) and has the potential to provide jobs to more than 50% of India’s population who comprise of semi-skilled and un-skilled laborers. For context, whilst the IT industry employs 5.43M people, the textile industry employs a whopping 45M people.
Secondly, manufacturing is relatively less prone to geopolitical shocks than the services industry. Throughout all the major wars and recessions, big tech and finance companies took huge hits and laid thousands of workers off whereas essential product companies like P&G or Nestle were hit relatively softly (because you can skip financial services, but you can’t skip food and necessities like baby powder). That will act like a shock-absorbent for India which could prevent the worst from happening to our economy.
Second of all, why manufacturing in India? That’s because we need more exports than imports (which is an issue that’s been pointed out before), but more importantly: protectionism. Indian industries are virtually killed off by companies in countries like China who can virtually dump cheap products in India, severely undercutting local products (example: Chinese toys sold from the 1990s in India killed off local toys production in India), which is why we need to counter them by increasing manufacturing in India which would lead to economies of scale and more cost-efficient product, lowering prices as a result. If all production went to China and nothing happened in India, we would virtually be debilitated. That’s even the reason Trump implemented his tariffs, because in doing so he would to some extent save American jobs.
[Geek stuff: As you can see in the graph, free global trade increases consumer surplus but heavily affects producer surplus, which damages local industries + jobs. Tariffs push back on that, which is why manufacturing in India will increase producer surplus, which has a positive spillover effect for jobs and income.]
Third of all, what’s wrong? From what I’ve studied of the business system in India, here’s a few glaringly obvious problems:
1) Red tape & bureaucracy: Despite all the talk of ‘cutting the red tape to roll the red carpet’, any smart foreign businessman who’s considered India will tell you otherwise. You need to jump through many hoops including registration, land acquisition, environmental clearances, constructing factories and a whole lot more which takes about 1.5-5 years which is an economic disaster. Compare that to Vietnam where it only takes 6 months to set up an operational company and you’ll see why India isn’t as lucrative as we think it is.
Doubt me? Just ask Elon Musk. 5 years ago, he talked about coming to India and asked for permission to sell imported cars to test the market and would later start production. India dug in its heels, demanded that he set up production in India, and basically forced him out of his deal. Add in the fact that (until recently) India maintained a ~100% tariff on imported cars and you’ll see why 5 years later, Tesla factories in Chennai remain a dream.
2) Environmental clearances: This is an interesting problem that arose ever since climate-focused regulation stormed our parliaments. This problem is so bad that once on a podcast, the Minister of Roads in India once complained that 406 projects worth ~$34B were stalled because they didn’t receive the necessary permits, which led to abruptly stopping work and causing many contractors to go into debt. That’s a huge problem many businessmen have complained about, whereas in Vietnam, everything (permits factory) only takes around 6 months.
3) Land acquisition: This is the elephant in the room. In any country, land acquisition is a headache, but more so in India. Buying land (itself) could years due to legal disputes over ownership of the land (which is a very common problem in India), settling compensation amounts which are given to the poor people living in these areas who are paid to relocate in order to free up the land (mostly in slums), and various approvals from various government departments.
The best example is when POSCO (a South Korean steel company) wanted to come to India and set up a production unit (worth $12B) in 2005, but it got stalled for nearly a decade because of land acquisition issues + environmental issues. As a result, the local residents (fueled by a political coalition) protested against the project and after 12 years of struggle, POSCO gave up and left India. The same thing happened when BMW came to my state (Kerala) when the Communist Party (the opposition party at the time) held a massive strike against the company which forced the executives to shift production from Kerala to Tamil Nadu (a neighboring state.) This is what is happening across the country and that’s why ‘Make in India’ is practically a nightmare for foreign companies trying to enter India.
Compare that again to Vietnam, where in 2008 Samsung was able to obtain permits and set up a functioning production unit in 2009 itself. The result? Samsung has now become one of the biggest investors in the country with Samsung having poured in $22B into the country, supplying countless jobs + FDI into the country.
Leave alone private industries. Government projects are delayed because of all these reasons. As of August 2022 (for example), 70% of infrastructure projects are delayed with an average delay period of ~3.5 years. Because of all these issues, we can’t develop more ports which leads to more time delays, less ships and containers, which in turn leads to a growing distaste for manufacturing in India.
And lastly, how can we solve it? Here’s two few wildcard solutions that has been tested on a micro-scale in India which I believe has the potential to be scaled nationwide:
1) Land-banking: This was initially a freak experiment conducted by one state, but this idea turned out to be one of the most ingenious strategies implemented in that particular state with the state landing multi-billion dollar deals within the state because it increased ease of doing business by a large extent. At a simple level, the government purchases huge tracts of land which are then immediately issued to businesses who want to be set up in the state. If we can scale this to a national level (ethically of course), I think we can exponentially reduce the waiting time for businesses to set shop in India.
2) Digitalization: This is a proposition that I’ve been heavily thinking about whilst writing this article: instead of having 4-5 signatures in order, why don’t we digitize the entire process and have biometric identification instead of official signatures in order to speed up a process? Thumb prints are way faster than signatures and files wouldn’t end up being clogged in the pipeline. It’s a wildcard, but it’s a strong possibility.
3) Expanding ‘Skill India’: The issue with Indian workers is that they aren’t high skilled to specialize in industries which is why advanced technological companies can’t move into India when they have more skilled labor outside of India. To give you context, only 2% of Indians have mastery over a certain professional skill. That number is 96% in South Korea, 80% in Japan, 40% in China, and 12% in Vietnam [all figures as of 2019, might vary slightly today]. China and Vietnam strike the balance between cheap and skilled labor, which is why companies flock to them when manufacturing products. India launched a program called ‘Skill India’, but only 5% of the population ended up benefiting from the program. If we can scale up this program at the national level, we can increase the skilled labor force in India which in turn attracts foreign companies to set up manufacturing units in India.
In short, ‘Make In India’ has failed to a large extent, but it’s not knocked out yet. If we can fix the structural issues in India, I feel like we can finally size up to the manufacturing giants of the world and bring back jobs (and FDI) to India.