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Economics of Make in India

Make in India

As a kid when I flipped around my battery operated toys, cars, wrist watches or even some electronic items at home, I could read `Made in Taiwan’. In those days of control, I used to feel privileged that I could use imported goods. Now, in the so called open economy our markets are infested with everything made in China whether it is our tech toy or those artificial flowers in the vase. I don’t particularly feel great about it. That makes me wonder what feelings would a `Made in India’ invoke all over the world.

 

Well, we may have to wait and watch how the world feels but with the launch of `Make in India’ our economy is certainly going to breathe a sigh of relief.  As I see it, Make in India is a great strategic intervention that has multiple ramifications. Mr Modi’s vision of making India into a global manufacturing hub is very well timed and well placed. He has a herculean task of bailing this elephant, (read Lion) out of its slumber. Indian economy is facing multiple challenges. Poverty, unemployment and inequalities rising, rupee is not showing any sign of recovery, growth is slipping south while inflation just about stabilizing after five years, industrial output dropping consistently, at 134 out of 189 India holds abysmal ranking on ease of doing business, most of Indian businesses moving out of India creating an environment of low confidence, fate of balance of payment is artificially regulated by gold import restrictions. Changing all this is a daunting task. Previous economist prime minister with an excellent track record and a PhD from Oxford along-with his incompetent team of empowered ministers had a humiliating defeat at this task.

 

Good news this time is that Modi is a man with a plan. And the plan is Make in India. Good thing also is that within hundred days he and his `unqualified’ ministers have already set the ball rolling. In layman’d terms, Mr Modi’s vision is to achieve manufacturing sector growth of 10% over the next few years from current level of 0.7%. He plans to do this by attracting foreign direct investment and foreign manufacturers to set up shops in India in 25 sectors that have been identified such as IT, Auto, pharmaceutical, chemical, defence, railways, textile, hospitality, wellness, biotech, power, food processing etc. In the bargain, we will be moving away from services oriented growth to labour oriented manufacturing driven growth. I reckon this is a great strategic initiative considering that growth from service oriented sectors is already slowing and that manufacturing has wider economic impact than services which are usually only bilateral.

 

There is deeper economic impact than we think. On one hand it is expected to generate employment for 10 million Indian skilled and unskilled people. When 10 million more people start to earn, save, invest money, it is ploughed back in the economy, it will help capital formation and further accelerate the pace of industrial growth. With enhanced capital formation for banks interest rates should fall. Lower interest rates will auger domestic business activity that will generate more employment, more incomes. This move will also boost ancillary businesses such as institutions like ITIs, E & B Schools, Training institutes, Recruitment Agencies besides the other ancillary industries like packaging, logistics etc. Prime Minister Jan Dhan Yojna is also a step in similar direction that has infused 1500 crores in the banks and hence in the economy. This should take the load off our mints which in turn should help currency valuation.

 

There is another benefit at Macro level. When we invest in export oriented manufacturing through this initiative, as we produce more, we export more. This earns us invaluable foreign exchange. Along with this, if we are able to control consumption of foreign goods we would end up exporting more than we import which creates a potential for us to turn the balance of payment position in our favor. Make in India is likely to attract more Foreign Direct Investment into India. Once that happens, it will control the free fall of rupee and may even being to reverse it. On an average, developing economies attract FDI of 30% of their GDP whereas India has been lurking at 12%. Economic Analyst Mr S. P. Kothari suggests that each 1% increase in FDI adds about 0.4% to GDP. So to boost growth by 2% we need 5% FDI growth which means on a $ 2 Trillion economy, we need at least $ 100 Billion FDI for 2% growth. That’s a tall order. Make in India, therefore is a great step in that direction.

 

There are many side benefits of this. I remember the time when Ratan Tata launched Nano he mentioned `this will force governments to develop road infrastructure…’. Unfortunately Nano did not take off as expected and roads never got developed. But this initiative will have to ensure that a very robust internal infrastructure is ready before the flurry of activity starts. Else, if the world loses faith in India this time around, we have no hope of resurrection.  Transport Minister’s `I am building 30kms of highways everyday’ barb is atleast fundamentally right. I only hope that he is speaking the ground reality. However, that’s not enough. We need more railroads, airways, ports, cargo handling capacity, more industrial parks and townships. All this development work has to be done from where we stand today with today’s constraints. Unless we are ready with all this, Make in India may just remain a dream.  This is exactly how America started its journey towards being a super power. We have a long way to go but Make in India may just be the right step forward.

 

_ Rahoul Joshii

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