Are we Ready to Make in India?

Posted in Finance Articles, Total Reads: 2411 , Published on February 20, 2015

The world economy is gradually recovering from a catastrophic slowdown with US, Europe and BRICS economies staging for higher than expected growth. India is also undergoing an economic revival, which is reinforced by the momentum received from the emphatic election mandate. It is the first time in last three decades that a single party has come in majority in parliament. With inflation and current account deficit under control, the overall industry outlook is positive. Joining the development bandwagon, Mr. Narendra Modi has launched the ‘Make in India’ campaign to facilitate investment and transform India into a global manufacturing hub.

The BJP government has set up ambitious targets and intends to push the growth in manufacturing sector to 13-15% and increase the share of manufacturing to 25% of GDP by 2022. The government is also aiming to improve the ease of doing business ranking of India from current 142 to 50. In order to achieve these targets, government has undertaken certain progressive policy reforms such as deregulation of diesel prices, e-auction of coal blocks and increasing the foreign direct investment in construction sector. Team invest India panel has been established to expedite the infrastructure and mining projects. In order to improve the responsiveness of government, this team invest panel has to respond to any investment project within 48 hours. Consensus is also building among the state governments to implement Goods and Service tax, Direct tax code and labor reforms. All these measures could herald increased investor confidence and vigorous corporate earnings. India is at all time high ratings in AT Kearney’s Foreign Direct Investment Confidence Index. BSE Sensex has also hit an all time high figure of 28000.

Interestingly, this is not a novel initiative and similar attempts have been made in the past without much success and, as a result, the share of manufacturing is stagnated at about 15% of GDP for the last three decades. The UPA government set up NMCC (National Manufacturing Competitiveness Council) to enhance attractiveness of the sector. But no improvement was observed. The manufacturing output, since 2005, as reflected by the Index of Industrial Production, has only increased by the rate of about 6% and is roughly at the same level in July 2014 as was in June 2011.

There is a need to analyze why despite of several attempts by subsequent governments India is unable to realize its manufacturing potential. India has a tremendous demographic dividend with the average age of population being 29 which is much lower as compared to US (37), Europe (45) and Japan (48). According to IMF this young population has the potential to contribute an additional 2% GDP growth each year for the next three decades. But this favorable demographic dividend is crippled with India’s dilapidated primary and secondary education system. About 80% of enrolled students dropout by class XII and only 15% apply for higher studies. As a result, millions of youth joining the workforce every year are semi-literate and incapable to match industry standards. Moreover, in order to make primary education universal, Government of India has launched Right to Education, which requires around 60 Lakh teachers to cater to the education needs of children in the age group of 6-14. But the quality of government teachers in India is pathetic which is evident from the fact that only 1% teachers were able to pass a test designed to filter out unqualified teachers.

The higher education scenario in India is also bleak. Thousands of MBA and engineering colleges have been mushrooming in every nook and corner of our country but most of them are churning out unemployable graduates. According to an estimate, around 200 MBA colleges have been shut down due to poor placements in the last few years after the global recession. Also, out of 15 lakh Engineering students in India, almost 75% are unemployed. Infact, IT companies like TCS and Infosys have to spend millions of rupees to make the fresh recruits ready to handle projects.

Considering the above facts it is clear that although there is no dearth of degrees in India, there is a dire need of skilled manpower. In order to achieve the target of 15% growth in the manufacturing sector, there is a need to create 20 million jobs every year and if our prime minister wants to ‘Make in India’, he has to realize that creating a single job in manufacturing requires Rs 19 lakhs.

If Mr. Modi has to conquer all these challenges, there is a need to take concrete initiatives at three levels of policy making. At the very first level, a reassuring fiscal framework will be required to improve the overall business environment. A single window project clearance system and a strong grievance redressal mechanism will help in achieving success at this level. At the next level, there is a need to create an ecosystem that encourages innovation. India is currently lagging behind China by leaps and bounds at this level. Finally, the government has to take steps to motivate entrepreneurs and SMEs.

However, this is a time of great expectations and the odds of having a breakthrough growth in manufacturing are very favorable. The global economic outlook is improving and Mr. Modi is taking encouraging first steps. "I want to change the ABCD culture - avoid, bypass, confuse, delay to the road to success, responsibility, ownership, accountability, discipline," he said at the end of the session at Vigyan Bhawan. He seems committed to invest in infrastructure development and deliver his promise of building 100 smart cities. He is also taking steps to improve the condition of people at the bottom of the pyramid and infact want to make villages the new engines of economic revolution.

In the nutshell, India is on the path of achieving global competitiveness and if the policy announcements are implemented vigorously, our country can even claim global leadership.

This article has been authored by Shekhar Raghav, Shashank Kaushik from IIM Ahmedabad 


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