What's keeping India from becoming a manufacturing powerhouse?
There are better ways to begin a speech. "All eyes are now on China... ohh sorry... India”. Here’s how Swedish prime minister Stefan Lofven started addressing a large audience of investors and businessmen on Saturday as Narendra Modi, his Indian counterpart, kicked off the ‘Make in India’ week.
The show went on regardless, and delegates attending the event clapped in their thousands as Lofven concluded his address. Still, the minister’s blunder alluded to a thought present in the minds of many visitors. India’s recent successes at attracting foreign companies, some suspect, result more from China’s current troubles than Delhi’s prowess.
Make in India is a big deal for Modi. A core part of his plan to cement India’s lead as the fastest-growing large economy, the programme aims to make the country a manufacturing hub through reducing bureaucracy and boosting infrastructure.
Indeed, despite clocking growth of 7.5 percent last year, India is not getting much better at making stuff: the share of manufacturing in its GDP remains stuck at 17 percent, far from its 25 percent target and much lower than China’s 35 percent. The country has created only 4 million manufacturing jobs since 2010. At the current rate, India may add about 8 million of them by 2022, far below the government’s target of 100 million.
On hype alone, Make in India has already scored points. Around 2,500 foreign and 8,000 domestic companies are expected to visit the 10 pavilions erected in Mumbai for this week’s event, the most ambitious since the programme was launched in 2014. Make in India is "the biggest brand that India has ever created", the prime minister says.
The pitch is starting to work: foreign direct investment nearly doubled to $59 billion last year, the seventh-highest level globally. Foxconn, the world’s largest contract manufacturer of smartphones, has pledged to open 10 to 12 plants in western India by 2020, employing as many as 50,000 workers. Carmakers including General Motors, Ford and Daimler are spending millions on building new factories in the country. At least four Chinese handset makers also have plans to dial in.
Foreign investors have good reasons to make the move. India has a plentiful and cheap workforce; it is a stable democracy with a promising domestic market. By contrast Chinese wages have quintupled in the last decade, with staff shortages and high turnover causing companies growing headaches. Some multinationals also believe China is becoming a politically riskier place to do business. They are further unsettled by Beijing’s increasing assertiveness in the region (China recently deployed missiles on a disputed island in the South China sea, it emerged yesterday).
But India won’t find it easy to keep its edge. Crucial land and labour reforms have been blocked in Parliament, where the ruling BJP doesn’t have a majority (the legal vagaries of land repurchases are an oft-cited reason why foreign projects suffer months-long delays). Infrastructure improvements, on the other hand, were always going to take some time. But the government hasn’t done enough to entice private capital into road, port and airport projects.
Delhi should also keep to its word regarding tax. Modi pledged not to reopen retroactive taxation disputes against multinationals on Saturday, yet days later the UK’s Vodafone was asked to pay a $2.1 billion fine related to a nine-year-old case. Most needed is a nationwide goods and services tax: the current system invites multiple taxes when products pass through states, negating savings made on labour costs and else. This reform, sadly, is also stuck in Parliament.
Sound macroeconomic management would also help. A major Achilles heel in India’s manufacturing plan is the inability of Indian companies to make profits, which in turns impairs their capacity to invest and buy. Some businesses are just badly run, but many others are seeing their profits eaten by interest payments. A portion of the underlying debt, linked to dud loans made by public-sector banks, should be written off. Creating a bad debt agency could help do this. Keeping to a prudent fiscal path, meanwhile, should give the central bank more leeway to further reduce interest rates.
India is an ironic place. During a week meant to celebrate the lion – the mascot of Make in India – a leopard escaped from a national park near Bangalore, capturing national headlines for three days. At least one can’t claim India is losing its animal spirits.