Sunday, December 14, 2014

Why would They Make in India?

When Prime Minister Narendra Modi announced the decision to initiate a ‘Make in India’ campaign, I was quite skeptical about it. When the campaign was put into motion, with those promoted tweets and ads appearing on the screens, I tweeted my misgivings about the campaign’s efficacy. My tweets did not receive any traction, perhaps they might have appeared as an outcome of the ‘jealousy of the losing side!’
Couple of days back, the RBI Governor himself went on record, questioning the rationale behind the ‘Make in India’ campaign. In his Bharat Ram Memorial Lecture on ‘Make in India, Largely for India’ Mr. Raghuram Rajan minced no words when he demolished the two arguments that were being advanced in defense of the campaign. First argument relates to following the export-led growth path of China. Mr. Rajan was of the opinion that the world simply cannot accommodate one more China. “I am counselling against an export-led strategy that involves subsidizing exporters with cheap inputs as well as an undervalued exchange rate, simply because it is unlikely to be as effective at this juncture” said, Mr. Rajan. Second argument of import substitution through the Make in India and preferential tariffs is also not valid as it would only end up in reducing the domestic competition, making producers inefficient and increasing cost to the domestic consumers, as rightly pointed out by Mr. Rajan.
Now Mr. Swaminathan Aiyar has also joined the ranks of skeptics. In a column appeared in the Sunday times of India (14/12/2014), Mr. Aiyar reminded the readers, and the Prime Minister that ‘Make in India’ cannot be a policy, but only the outcome. I do not think anyone can say it any better!
Let us take a look at why this campaign is not destined to succeed.  Mr. Modi has successfully led another campaign that made him the Prime Minister of the country, almost on similar lines. Both Modi’s prime ministerial campaign and the Make in India campaigns are based on sheers promises and dreams and not on any verifiable initiatives. Mr. Modi succeeded in the first campaign. However, the promises made during the campaign were immediately given up, resulting in a record number of U-turns by (probably) any elected government. The leaders and ministers of the BJP are on record that those promises were not serious promises and governance cannot be based on promises made during the campaigns, Never mind, a lot of voters who voted Mr. Modi and BJP, based on those very promises!
Voting in elections is likely to happen on the basis of dreams and sales talk as the voters are not accountable to anyone for their decisions. Unfortunately for Mr. Modi, the decision makers who commit the precious capital, to any new venture are more accountable than the voters. Both in law and practice, the corporations are duty bound to ensure maximization of profits and value for the shareholders. All the sweet talk about corporate social responsibility and socially conscious leadership is nothing but clever marketing jargons that help the corporations in furthering their pursuit of more profits. In the light of these hard realities, let us look at that factors that might attract a corporation to undertake or shift their manufacturing activities to India or any other country for that matter.
The entire process of globalization and outsourcing are based on the pursuit of markets where the products can be made or purchased at the cheapest costs, or can be sold at the highest profits.  If we want someone to shift their manufacturing to India, we need to provide a cost advantage to them. In my view, it can happen only under five conditions. First condition is the availability of the cheapest labor, including the absence of any credible regulations that govern labor relations. In other words, the ability to establish and run the infamous sweatshops! If not anything else, a reasonably strong trade union movement in India The second condition is the presence of a strong research and development regime. We can easily ignore this condition as India is not anywhere on the R&D or technology scenario. The third condition is an atmosphere that allows easy and unchecked exploitation of the environment and natural resources. Despite the initiatives of Modi government and its environment minister in speeding up the environment clearances, India has a robust environment protection regime that any sensible investor will see the risks of circumventing those laws. Even if the government grants clearances, there is still a risk that the projects might be held up later due to enforcement of the environment protections laws by the judiciary. Therefore, this third condition will also not apply to India, unless Modi Government can ensure change in those laws, which is very unlikely.  The fourth factor is the absence of any accountability. There were reports suggesting that many sunset industries in China are looking to shift their manufacturing to India as China has launched a massive drive to relocate outdated and polluting technologies to neighboring countries.  Even though, India has incidences of unaccountability, like Bhopal tragedy, its robust judiciary and vibrant democracy are safeguards against any gross unaccountability from either the government or corporations. Indian people are quite aware of the perils of polluting industries and are not likely to meekly accept their presence in their respective localities.
All the four factors discussed above are not contributing to making India a preferred location for global manufacturing. Thus, not many global corporations are likely to look at India as their manufacturing destination for export-oriented production. That makes success of the entire campaign dependent on the fifth and last condition, which is a high level of domestic consumption. Is the domestic consumption is high, it may make sense to the global manufacturers to produce in India instead of importing it from some other place. It is no secret that India could, by and large, isolate itself from the global economic meltdowns of the recent past (albeit with a lesser rate of growth), on the strength of its domestic consumption.  It is also seen that welfare initiates like MGNREGA had increased the availability of income in the hands of India’s vast rural population, allowing them to increase the domestic consumption. With the dilution of MGNREGA by the Modi government wherein the Govt is reportedly considering reduction of spending on wages, the boom in rural consumption is also likely to go down in the coming months. Therefore, there is no evidence to suggest that an increasing domestic consumption will force the global manufacturers towards shifting to India.
As discussed above, none of the five factors having potential to attract the manufacturers, to a country are showing any promises. There has not been any initiatives (barring some hasty and questionable environmental clearances) from the government towards making any of those five factors more attractive. Therefore, despite the high volume campaign, there is nothing to make the global business towards the Indian market. The only factor is a change in government, with Mr. Modi assuming the chair of the Prime Minister. This one change may be sufficient for the Modi fans to dream that India has changed, but surely not enough for the decision makers of the global manufacturers.
If the Make in India campaign has to meet its objectives, it will require much more concrete action than mere selling of dreams and promises, and the image of a person. More so, when the responsible leaders of the ruling party dare to go on record that not all promises are serious promises!

1 comment:

  1. I think apart from the politics you have explained above there are some points worth discussing.

    1. Cheap Labour - This was the case of last decade and now the focus is on Skilled Knowledgeable workers. Even in the Service Sourcing industry, it is not just the cost, but the value additions and knowledge support is the main differentiator. It may not be that important in manufacturing, but there is a percentage of weightage going over this.

    2.R&D - India is either involved directly or indirectly in many R&D activities. When I said about this, this is mostly through Indian Professionals or resources. So that means we have a good pool of resources that can be utilized for R&D.
    3.Environment - Even if the govt eases the conditions, most of the multi nationals cannot ignore these. There are many norms set by the European/US/UN agencies for manufacturing and service industries including WCA, Social Compliance, Environmental Protection etc. So if we are not adhering to these we cannot work. So there is no point Govt is making all these formalities/obligations easy for the industry. Having said so, as Indian ventures fully compliant to all these international measures, we can successfully work in a low cost lines.
    4. Upto a level you are correct. But as per my point above, all international agencies require this compliances
    5. Domestic Consumption - With numerous international products stopped its import and started manufacturing in India, we can understand what is happening here. Consider the example of AMWAY, where their products are proprietary and patented, even their most special nutritional products are being manufactured in India. Make in India works here?

    Now on the practical views, I am not thinking anyone wants to manufacture anything and everything in India and export it to other countries. As you have said, if we consume these manufactured stuffs, that will make our costs come down and our employment rates go up including strengthening our technology fields by getting more R&D opportunity and experience.

    I also think Make in India is something new. May be that caption is used by Modi, but earlier also this is happening. So right now opposing the caption seems fine but rejecting the benefits out of this movement is undigesting.

    We, India, as one of the growing economy and home for the highly skilled intelligent human resources, still don't have many manufacturing capabilities. Looking the defence demand itself, we can see, number of products are bought with technology transfer and assembled in India. What does that help us? We surely can build our own products from the experienced gained from these. As well as, get more opportunity to get employed in India with the benefits that earlier used to get only from rich foreign countries...