India: If they can make it there . . .

The stage was set for a triumphant relaunch of Make In India, Prime Minister Narendra Modi’s big push to transform the nation into a manufacturing powerhouse — until, that is, the stage itself burst into flames.

The evening in Mumbai began well enough, as foreign business leaders and local celebrities trooped down to Chowpatty beach to applaud Mr Modi’s vision of igniting a Chinese-style manufacturing renaissance. But just after Bollywood star Amitabh Bachchan finished reading a poem, flames began to flicker at the base of the stage, building quickly into a giant blaze, visible for miles.

No one was killed, but the hurried evacuation was hardly the start Mr Modi wanted, especially when it turned out that the stage was made in India. The remainder of his inaugural event on February 14, designed to boost India’s lackadaisical manufacturing sector, went better, as hundreds of foreign companies attended a jamboree in Mumbai’s financial district.

Amitabh Kant, the charismatic civil servant behind the drive, was in a bullish mood, claiming to have booked Rs15tn ($219bn) in manufacturing deals. “Make In India Week in Mumbai has been a phenomenal hit,” he said.

Mr Modi could only agree. “Make in India has become the biggest brand India has ever created,” he said in his opening speech. “We want to make India a global manufacturing hub.”

It is hard to overestimate the significance of that goal. India’s economy is expanding at 7 per cent or more. This year it raced past China to become the world’s fastest-growing big nation, easily outperforming rivals like Brazil and South Africa.

Yet most analysts say India’s hopes of accelerating growth close to its goal of 8-10 per cent over the next decade, and eventually making the leap from poverty to middle-income status, require far bigger changes — beginning with a shake-up in manufacturing.

Gainful employment

For the world economy, the stakes are high. As growth slows, many hope India can become a far bigger source of demand. Yet seen from New Delhi, solving the manufacturing riddle rests on an even bigger dilemma: jobs.

Nearly 120m will enter the labour force over the decade to 2024, as India enjoys, or perhaps endures, an unprecedented demographic bulge. Most will be unskilled youngsters or farmers moving to cities, seeking jobs in the kind of low-skilled labour-intensive factories that powered China’s rise. If Mr Modi cannot provide them, he faces electoral unpopularity, even social unrest.

“This is the biggest economic issue facing India,” says Rajiv Kumar, senior fellow at the Centre for Policy Research think-tank. “If Modi gets it right, it can change the country. But politically what matters are jobs, many of which will only come from manufacturing, which is why he is pushing so hard.”

That push will intensify next week, as manufacturing is placed at the heart of India’s annual budget, while Mr Modi reassures global investors that his programme of reforms has not run out of steam. Here he has his work cut out. Manufacturing as a percentage of India’s gross domestic product has been stuck in the mid-teens for decades, far below China and other Asian economies. Worse, it has been declining of late, with exports also falling because of the global slowdown. Mr Modi could hardly have picked a trickier time to kick off an export-led manufacturing drive.

India’s problems, especially on job creation, are clear. This month, Swedish electronics group Ericsson unveiled plans for a second factory in the country in the western industrial hub of Pune — just one of a spate of Make in India deals last week that also included a $10bn factory pledge from Anil Agarwal, the billionaire founder of London-listed Vedanta. Ericsson’s plant will be much smaller, at just $15m. But Paolo Colella, its regional head, says it is still significant, representing a diversification away from making high-tech telecoms equipment in China. “We want India to be an export hub,” he says.

Other foreign businesses are bullish, too. “Today our investment in India is half of China, but the trend over the next five years is heavily towards India,” says Ed Monser, chief executive of Emerson Electric, a $25bn US-based manufacturer of control systems for industrial plants. He says Emerson will spend $500m over the next few years, adding four more factories to its existing 17.

Such investments sound impressive, but there is a caveat. While Ericsson employs 22,000 people in India — more than in any other country — only about 1,000 will be involved in making products in its new factory. The rest are highly skilled roles hardly suitable for unskilled young workers. Much of that work will be done by robots, a conspicuous number of which were seen during the Make in India event.

Mr Modi hopes more companies will follow Foxconn, the Taiwanese group that makes Apple’s iPhones, which last year announced a dozen new Indian factories, employing up to 1m workers. Yet the odds on the development of many more such facilities are slim, argues Mr Colella. “Modern manufacturing has a high degree of automation, so it doesn’t necessarily drive employment,” he says.

Other big companies have launched Indian investments, including a $1bn push from US carmaker General Motors. Some Chinese mobile groups have begun making phones in India too, with Apple likely to follow soon. All this helped push foreign direct investment to record levels last year. Inflows could go even higher in 2016, hitting $60bn, according to Goldman Sachs.

Mr Modi is certainly keen for more. “My friendly advice to industrialists: Don’t wait. Don’t relax. There are immense opportunities in India,” he said this month.

Yet the challenges are formidable, beginning with Make In India itself. Even those impressed by last week’s manufacturing fiesta in Mumbai admit to confusion about its aims. Is it a slick marketing push, complete with strutting lion logo, to appeal to investors? Or is it a broader plan to cajole recalcitrant civil servants and the heads of India’s state governments to deliver reforms to make manufacturing easier?

“This thing is clearly great business for any company that can make lion statues out of cogs and screws,” joked a foreign business leader last week. “But can it deliver much more? The jury is out.”

Labour challenge

The global slowdown does not help. Growth in real exports juddered to a halt last year, from 20 per cent in 2011. Many big Indian companies are mired in debts and unwilling to invest in new export facilities. Arvind Subramanian, chief economic adviser at the finance ministry, says larger industrial companies are beginning to hire more people, partly because some states have improved labour rules. But on average Indian companies remain far smaller and less productive than their Chinese rivals. More than 90 per cent of workers are stuck in the informal sector where they are not taxed or monitored by the government, the highest level in Asia

Then there are more familiar problems: rickety roads, clogged ports, unreliable power supply, finicky labour laws and zealous tax inspectors. Mr Modi says he will fix all of this, but even his allies admit he is doing so slowly.

Not everything is Mr Modi’s fault. Pranjul Bhandari, an economist at HSBC, says around half of India’s export drag comes from factors such as weak global demand, or fluctuations in the rupee. “The outlook for exports . . . is not very encouraging,” she wrote recently. Even so, this is can be seen as a cause for optimism, given that the other half — those “domestic bottlenecks” — are within India’s control to fix.

Mr Monser says progress is being made. Emerson used to have to renew licences each year for every one of its 17 factories, requiring tedious communication with four government departments. Under Mr Modi, the company now gets one “single window” approval, lasting for three years. Still, myriad other problems remain, and often in unexpected places. “Movement of cash in and out of the country is a big issue,” Mr Monser says. “Even moving cash from one state to another is a headache.”

Other problems are more integral to the manufacturing sector, which has altered dramatically since China first opened up its coastal export zones in the early 1980s.

“The trends in global manufacturing are unmistakable,” says Tushar Poddar, an economist at Goldman Sachs. “It means less capex [capital expenditure], more investment in software and less trade overall, which seems to have hit some kind of peak around the time of the competition of China’s integration in the global economy. All this makes it hard for India.”

Domestic demand

All of this has kicked off a deeper debate: should India even pursue an aggressive export strategy? Last year, Raghuram Rajan, governor of the Reserve Bank of India, argued in a speech that Make in India would be better dubbed “Make for India”, meaning that foreign companies should target India’s rapidly growing domestic market, not exports.

“There is a danger when we discuss ‘Make in India’ of assuming it means a focus on manufacturing, an attempt to follow the export-led growth path that China followed,” he said.

Mr Rajan’s views are controversial, with many others equally outspoken that India must follow the Chinese path.

Mr Subramanian is one who is critical of Mr Rajan’s argument. “On this I think Raghu is just dead wrong,” he says. “Our aim is to grow at 8 to 10 per cent, which isn’t going to happen without a bigger focus on exports. India must continue to grow its export of services, where we have a competitive advantage, but we need to export more manufactured goods, too.”

That is easier said than done. At one level, the growing links between services and manufacturing in the supply chains should help India. As global companies like Ericson or Emerson look to mix in sophisticated services with their physical products, they may well look to India, given its strengths in engineering, research and IT. Yet these areas will not create many jobs, suggesting that India must look at other labour-intensive sectors instead, such as food processing or tourism.

All of this refocuses attention on the importance of Make in India, and the two futures the country faces. Either Mr Modi’s vision will prevail, hitting his target to boost manufacturing through a swift industrial transition. Or, as seems more likely, India will get part of the way, making the journey out of poverty with a manufacturing sector that is far smaller than that of any other major Asian economy before it. Meanwhile, Mr Modi will have to find work for those millions of poorer workers.

“[Modi] has a sense of urgency, and the bureaucratic hurdles, which used to be tremendous, are coming down,” says Mr Agarwal, the billionaire who launched plans to set up India’s first liquid-crystal display manufacturing facility this month. “Will it be able to change things and provide all those jobs? We must all hope it does.”

Letter in response to this article:

Change the slogan to ‘Invest in India’ / From Prof Jagdish Bhagwati and Prof Pravin Krishna