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ECONOMY
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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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.
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.
High expectations
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.
Talent shortage
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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8/21/2017 Unless Urgent Steps Are Taken, Make in India Will Remain a Non-Starter - The Wire
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.
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.
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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.
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.
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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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