Why Make-in-India May Not Make India?

The official strategy for economic development in India is 'Make In India'. This is based on an economic strategy for the dummies - that as China becomes more expensive, India should take its place as the World's workshop - that underwrote the massive electoral victory of India's charismatic new Prime Minister, Narendra Modi. The strategy, so simple that even a simpleton should understand, combined with Mr Modi's 'Track Record' of drawing investment to Gujrat, was dream stuff that makes winning politics, particularly in a country where 69,000 people turn 25 every single day.

What makes good politics isn't good economics. China had uneven manufacturing output in the last few years not because it was becoming expensive, but global demand was faltering. Manufacturing, the key to its strategy to lift millions of people out of poverty in the 1980s and 1990s, was not creating as many jobs as we would like to believe it did in the recent years, as automation caught up in Chinese factories. The official Chinese job data shows that there are 30 million less manufacturing jobs since 1996 despite soaring output (see The New World Order, by Andrew McAfee et al, Foreign Affairs, July/August 2014). Not only outsourced manufacturing isn't expanding as rapidly as it did a decade earlier, and creating fewer jobs, the transformed nature of manufacturing, automated and skill intensive, would tend to keep the activities geographically clustered. So, the underlying idea behind the sexy slogan, has little promise in turning around India's economy.

But it gets worse. Lord Kumar Bhattachryya, of Warwick Manufacturing Group, observed recently that Make-in-India should be Made-In-India. This is indeed logical, but this is not part of the Indian strategy. The political imperatives of Make-in-India are antithetical to what is required to climb up the value chain of manufacturing. Made-in-India would require harnessing domestic manufacturing, designing and business capabilities, which would not work in a tariff-less world. Japan, Korea and now China, may have moved up the value chain, but they did so by using political leverage of their unique geopolitical situations and by maintaining largely protected domestic markets to harness domestic capabilities [China did this through a combination of currency control and trade barriers]. Mr Modi's Make-in-India is dependent on Foreign Direct Investment, which would rule out any such protective options. Besides, the Indian aspiration is to become a low cost destination, of cheap labour, without trade union interference or environmental niceties, to get foreign companies manufacture in India. That, however, is hardly the path of sacrifice, capability building and long term strategy that Make-in-India embodies.

Mr Modi, of course, is beholden to his past experience and takes his slogans seriously. He spent the first 18 months of his premiership travelling around the world, connecting with Indian diaspora and selling the Make-in-India promise. On the other hand, his government has done very little in terms of education or health, and the promised reforms or projects in those areas, have not featured in the legislative agenda. Nobel Laureate Amartya Sen has observed that India is trying to achieve economic growth with a largely uneducated and unhealthy labour force, and this has no precedence in history. Make-in-India has set the wrong priorities.

As we approach 2016, emerging markets look shaky, as if they are about to join into a third act of the economic crisis, following the 2007/8 credit crisis and Eurozone woes. India, among the emerging markets, is comparatively more solid, and because of its better current account position, may escape the worst if a crisis did indeed happen. However, a credible economic strategy is more important than ever, because a global turn against the emerging markets may quickly affect the stock markets and already fragile real estate markets in India, unleashing a crisis nonetheless. Make-in-India isn't something that would hold up if and when the music stops. It is time for the Indian government to stop electioneering and start governing with a sense of urgency.