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India Could Still Be a Manufacturing Powerhouse

But can Prime Minister Narendra Modi get his “Make in India” campaign off the ground?

Indian women work at the electrical wiring section of the OREVA E Bike manufacturing facility near Samakhiali of Kutch district, some 240 kms from Ahmedabad on May 24, 2012. With the recent hike in the price of petrol, the demand for E-Bikes could possibly increase. AFP PHOTO / Sam PANTHAKY (Photo credit should read SAM PANTHAKY/AFP/GettyImages)

Can India become a manufacturing powerhouse? Its new Prime Minister Narendra Modi certainly hopes so. Though his country has lately made its name by producing services rather than goods, Modi sees a Chinese path to prosperity for his compatriots. He’s on the right road and saying the right things, but can he walk the talk?

In September 2014, when Modi announced the “Make in India” campaign, many economists, policy analysts, and commentators cheered. Manufacturing is an easier way to create jobs en masse than services, since it requires little in the way of formal education or direct contact with foreign consumers. The campaign is supposed to increase manufacturing’s share of the economy by encouraging domestic and foreign investors to set up operations in the country, whether for export or for the domestic market.

It will not be an easy goal to achieve. One of the peculiar features of India’s economy recently has been the stagnation of manufacturing’s share of gross domestic product at roughly 15 percent — while the share of services has grown. In a large, labor-abundant economy, this is unusual. Basic economics and historical experience suggest that with low wages and a huge workforce, manufacturing should have taken off.

This, after all, was the secret to China’s success. When Beijing liberalized its economy in the late 1970s and began to grow rapidly, the success came from large-scale, labor-intensive manufacturing — as it did for Japan and East Asia’s other miracle economies.

Somehow, India took a detour. Now, getting back on track is a political imperative for Modi. His Bharatiya Janata Party (BJP) and its coalition allies, the National Democratic Alliance (NDA), swept to power in a landslide victory in general elections in May, ousting the two-term incumbent, the United Progressive Alliance (UPA) coalition led by the Congress Party. Economic development was one of the centerpieces of his campaign, so it made sense that a shift toward manufacturing — with its unmatched capacity for creating jobs — would be one of his government’s highest priorities.

Modi’s political reality doesn’t change India’s economic reality, however. Even with wages in China rising, some prominent economists doubt that India has what it takes to go head to head with the Chinese in global markets and beat them at their own game.

Raghuram Rajan, the governor of the Reserve Bank of India, created controversy when he seemed to criticize the “Make in India” campaign at a recent speech in Delhi. Rajan, formerly a professor of finance at the University of Chicago with a distinguished academic record, also served previously as chief economist of the International Monetary Fund (IMF). But he is also an appointee of the previous government.

His doubts stem from the global economic downturn. With demand for cheap manufactured goods growing at a slower pace than during China’s rise, India may have a hard time asserting its advantage and finding new markets for its products. Like China today, he said, India may have to rely on domestic demand to fuel its growth.

Yet perhaps Rajan was making too ambitious an interpretation of the Modi government’s announcement. Even if India cannot realistically hope to displace China, even a small increase in India’s share of global manufacturing and the increase in employment it would bring would be positive.

Also, Rajan may be too pessimistic about the global economy. China’s economic reform package, Europe’s slow reform of its financial policies, and Japan’s radical attempts at stimulus will likely yield higher growth in a few years. If India gears up today, it may be in a better position to become a major manufacturing economy than if it waits until a global economic recovery is already well underway.

After all, India is decades behind China in terms of urbanization, exports, and foreign direct investment: The cost of the lost opportunity is huge, and the problem remains unresolved.

India is going to need to find a way to create jobs for hundreds of millions of young people, and only manufacturing can provide that opportunity. Unfortunately, despite Modi’s apparent sincerity, his government has so far offered only a slick website and marketing campaign rather than the economic reforms that would be needed to turn the aspiration into a reality.

The major impediments in India remain labor laws that make hiring and firing difficult, and rigid land acquisition laws that discourage the purchases necessary to start manufacturing operations. What’s more, India’s basic infrastructure is still so creaky that there are many practical difficulties to setting up a factory. Intermittent and unreliable power provided by the public utilities means that factories need their own private diesel generators, jacking up the cost of production and increasing airborne pollution that would disappear if there were a reliable power grid. And once a factory has made its products and is trying to get them to market, it has to contend with poor quality roads, rail, and shipping infrastructure.

To be sure, policy reform in India is politically difficult. Although the BJP and its allies have a majority in the Lok Sabha, the lower house of parliament, they lack one in the Rajya Sabha, the upper house — the Congress Party and its allies can still block legislation in the upper house.

Yet building reliable infrastructure does not require legislative reform, just the government’s commitment to get the job done. This can happen through administrative fiat, so long as the government budgets the necessary funds. Here the news is better. From their many announcements, it’s clear that Modi’s government is committed to ramping up infrastructure development, in part by luring investment from foreign countries such as Japan and Russia.

Of course, a reliable power grid and well-functioning roads aren’t built in a day. By contrast, once legislative reform happens, the land and labor markets will be unlocked very quickly.

Though a lot of heavy lifting remains to be done for either approach to succeed, Modi has made clear that boosting manufacturing and employment is one of his government’s highest priorities. He might do well to remember that his predecessor, Manmohan Singh, said exactly the same thing in 2013, and did almost nothing about it. But then that was when the Singh government had only a year left in office. Modi is still early into a five-year mandate, and has time to get the job done.

It’s time for the rubber — and the bulldozers — to hit the road.


Rupa Subramanya is a Mumbai-based economist and co-author of Indianomix: Making Sense of Modern India. Follow her on Twitter: @rupasubramanya.