India is an outlier in terms of economic development. Traditional economic theory suggests that in the beginning all economies are dominated by agriculture. As the economy develops, manufacturing becomes the predominant sector. Further up in the stage of development comes services. The linear development is the model for all countries, including China. The one exception is India.
India has never been a manufacturing economy and has leapfrogged to becoming a service economy. A full 55% of India\’s economy is the service sector. This is all fine, but for one problem. Where are the jobs for the teeming millions of Indians going to come from ? You need a big manufacturing base to absorb the youth coming into the job market every year. India has to create 12 m new jobs every year. Hence the Make in India need.
India actually has a huge competitive advantage now – it is actually cheaper as a manufacturing destination than China. China has become expensive, but retains its predominant position simply because there is no real alternative at that scale. Countries like Vietnam or Bangladesh are small. The only big competitor is India.
Achieving real manufacturing scale and , thereby jobs, will need concerted action over 20 years. Mere slogans will, of course, achieve nothing. This has to be backed up by proper policy action.
What is needed to be done ? Quite a lot actually, but let us begin with three things that do not need to be done
– Tax incentives to manufacturing. This is the soft option, but must not be done. Neither is it necessary nor is it equitable to do so.
– Lowering interest rates. All the pressure on the RBI governor is self serving bullshit. No serious company makes investment decisions based on short term interest rate
– Diluting labour laws. Actually this is hardly needed. Labour laws, other than when factories are closed, are actually sensible, fair and progressive in India today. It is better than, say, in France. We should not dilute labour laws and allow the Rambo manufacturing that happened in China.
The key elements that need to be tackled are
– Amending the Land Acquisition Act. The last Act completely swung the other way and as it stands now it is almost impossible to acquire land to set up a factory. The government, realising this, is acting through an ordinance
– Infrastructure – Ports, Roads, Railways and Power. This will take time, but must be done largely by the government, although partnership with the private sector will also be key.
– Single window clearance from the government. All clearances within 3 months for setting up a factory. Doesn\’t matter if a mistake or two is made.
– Remove all caps on foreign investment in manufacturing. Who cares where the money is coming from as long as jobs are created.
– Rein in Ramamritham. If possible chop him into bits and throw him into the sea. You just have to drive through Sriperumbudur, on the outskirts of Madras to see the havoc Income Tax Ramamritham has caused. Shut factories – Nokia, Foxconn …… Any industrialist who now starts a factory without a cast iron defence against Ramamritham is an idiot.
– Enforce contacts and the rule of law speedily. Perhaps even a separate judicial process for business matters. One of the sad facts in India is that despite the rule of law, contracts, especially with the government, are practically unenforceable.
– Make India, one India. Each state competes with others to create bottlenecks and roadblocks, because of the preponderance of local Ramamrithams. National laws, such as the GST are an imperative. The Centre cannot dictate this, but should simply go ahead with the willing states and leave the outliers either to join the bandwagon or suffer.
– Stay the course. Create the framework and then don\’t change it for a decade at least. Let a thousand flowers bloom !
None of this is even politically contentious in a major way. Start and build momentum. Investments will come. Money will be found. A juggernaut, once started, cannot be stopped – there is already the example of the IT industry.
Motor ahead, India.