The ‘Make in India’ reverberated all through the speech of Prime Minister Narendra Modi during his Independence Day address on August 15, 2020. Even before the Corona pandemic, in the Union Budget for 2020-21, Finance Minister, Nirmala Sitharaman proclaimed the commitment of Modi government to this laudable goal. This is the most crucial component of the strategy to make India a US$ 5 trillion economy by 2024-25.
Faced with a whopping contraction in GDP (gross domestic product) by close to 25% during the first quarter, continuing slide during the second quarter and projected decline for the whole of current year by 5% – 6.5%, US$ 5 trillion target may have lost much of its sheen for now. Nonetheless, the government has other compelling reasons to pursue ‘Make in India’ vigorously.
First, the devastating impact of Corona on economies world-wide in particular, precipitous decline in the economy of China (which accounts for a big chunk of imports by India for instance, of the technical material that is used for making end-use agrochemical products, 50% comes from China) has led to disruption of global supply chain. This has created pressure on India to go full blast for increasing their domestic production and achieve self-sufficiency.
Second, frequent changes in rules by Chinese government specifically targeting US, Europe and Japan based multinational companies (MNCs) and former’s deteriorating trade and investment relationship with the latter have prompted hundreds of MNCs to exit that country. They are looking for other destinations for relocation. Modi wants to seize the moment and make India a manufacturing hub by making all out efforts to lure them invest in India. To make it happen, Modi wants “our policies, our processes, our products, everything should be best, should be the best.”
Put simply, Indian industries should endeavor to manufacture products which are in a position to compete – both in the domestic and international market – in terms of the price as well as quality. Broadly, two sets of factors are relevant here: (i) those which are ‘internal’ to a firm and (ii) those which are ‘external’.
The factors under (i) include the ability of the firm to innovate products which meet the demand of consumers in a manner that offers latter quality, safety and convenience, putting in place manufacturing practices which deliver best products on all these counts and optimizing all factors of production viz. capital, labor, land and technology to ensure that cost of supply is kept to the bare minimum. All these are within the control of the firm.
The factors under (ii) include the availability of raw materials and other inputs at competitive price, hassle free logistics and transportation at low cost, availability of capital from credit institutions such as banks at low interest rate, a taxation structure that lowers the incidence of tax on products. Most of these factors under are beyond control of the firm. These depend on the macro-economic environment which in turn, is influenced largely by government policies.
Look at petrol, diesel, aviation turbine fuel (ATF) whose price has a crucial role in determining the cost of almost every enterprise, be it in manufacturing or services. Even as de jure, these items are deregulated, the lack of competition leads to an upward bias in their prices which get aggravated due to high taxes. At present, these are out of GST (Goods and Services Tax) which means they continue to attract central excise duty (CED) and value added tax (VAT) at high rate. As a result, the tax component alone is nearly 2/3rd of the retail price.
Power is another major input that impacts the production cost of an enterprise. More than 90% of the electricity is supplied by power distribution companies (discoms) at tariffs determined under complex cost plus mechanism. These rates subsume inflated cost allowed to power generators, pass-through of ever increasing fuel cost, electricity tax and other levies, supplies to farmers and poor households at subsidized price (call it ‘cross-subsidy’), large-scale theft etc. The industries are thus made to pay for power at high rate.
The businesses also face high cost of transportation and logistics thanks to high rail freight on movement of goods having to subsidize low fare on passenger traffic, high diesel price pushing up cost of movement by road exacerbated by high toll tax on the highways (even as the concessionaires seek to recover inflated expenses on building roads – due to high capital expenses plus high compensation having to be paid to persons whose land is acquired). Where ever exports and imports are involved, high port handling charges add to cost.
Finally, they have to pay high interest rate on both long-term and short-term funds borrowed from banks and other FIs. Though, interest rates are deregulated and the Reserve Bank of India (RBI) also keeps prodding them to lower the lending rate (in the last 18 months or so, it has reduced the policy rate – interest rate it charges on money lent to banks – by 2.5% to help them), the borrowers have not got much relief thanks to the high non-performing assets (NPAs).
Most enterprises are hamstrung by these external factors which many a times offset the inherent competitive advantage of firms by virtue of being strong on the internal front. Ideally, the government should focus on removing these external bottlenecks. If, the cost of fuel, transport, power, interest rate etc are brought down from their present high to reasonable level, this will automatically sharpen the competitive edge of Indian firms and move us closer to the goal of making India a manufacturing hub.
Instead, the government seems to be moving in a direction that does not augur well for its Make in India mission. It is increasing customs duties (during 2014 – 2019, the government raised import duty on 3500 items), raising non-tariff barriers e.g. requiring dairy and poultry products to meet certain specifications and now even implementing ‘license regime’ for certain imports (e.g. import of TV sets) etc.
In certain sectors such as agrochemical, it is micro-managing things to a point of barring import of certain products for which indigenous facilities exist. Import of fertilizers such as urea is permitted only on ‘residual’ basis i.e. only to an extent domestic production fails to meet the demand. Moreover, only agencies authorized by the union government such as State Trading Corporation (STC), Minerals and Metals Trading Corporation (MMTC) etc. can import.
With this protectionist mindset, on November 4, 2019, Modi announced India’s decision not to join the Regional Comprehensive Economic Partnership (RCEP), a group of 10 members of Association of South East Asian Nations (ASEAN) viz. Malaysia, Indonesia, Thailand, Vietnam, Singapore, Philippines, Myanmar, Brunei, Laos and Cambodia plus 6 others viz. Australia, New Zealand, Japan, South Korea, China (besides India) covering 50% of the world population and nearly 40% of the world GDP.
From the same prism, it is reviewing existing Free Trade Agreements (FTAs) with ASEAN and its member countries. This approach has also stymied chances of signing a limited deal (this is largely about goods and market access) with USA forget concluding a FTA. For the same reason, talks for FTA with European Union (EU) and other countries are not progressing at the desired pace.
The logic behind the current policy actions is an underlying belief that domestic market be reserved exclusively for India made products only. By the same logic, what if other countries argue that they want to reserve their local market for products made there only. In that scenario, our exports are bound to take a hit which India won’t like. In fact, PM wants India to ‘Make for the world’. India can’t have the cake and eat it too. A situation where India can sell its products in other countries but latter can’t sell their stuff here is untenable.
It is also inconsistent with the goal of doubling India’s GDP to US$ 5 trillion by 2024-25. To achieve this, it is looking inter alia to doubling of exports from current over US$ 500 billion to US$ 1 trillion and 2.5 times increase in agricultural exports from US$ 40 billion to US$ 100 billion. With a protectionist policy stance, the goal will look like day dreaming as faced with restrictions on their exports to India, it is most unlikely that other countries would allow uninhibited entry of our products to their markets.
The government should shed its current policy stance. Instead, it should go for an open trade policy and sign FTAs with groups such as RCEP, EU as also with individual countries. As for perceived threat, there is ample scope for improving the competitiveness of India made products by addressing key bottlenecks under the ‘external factor’ category as brought out above.