The ongoing ‘Make in India’ Week has created quite a bit of enthusiasm within industry as the nation reinforces the sentiment that has been building up through the year. The campaign was launched over a year back and it is time to reflect on its progress and success.
‘Make in India’ concept has been debated in the past on what it was to mean. Was it to provide a push to manufacturing and investment? Was it to bring about import substitution which would moderate our trade balance? Was it supposed to flood the global market with Indian goods and push up our exports to improve our current account? The last might have smelt like hubris; but the discussion table did bring about this point of view especially in the light of the Chinese slowdown where experts have seriously debated whether we can step in the space that China has left in the global economic arena.
If we look at the data that is available, it blows hot and cold over the success of ‘Make in India’. The recent GDP growth numbers have projected manufacturing in a steady light with a number of 9.5%. This gives one the feeling that things are happening. However, if we juxtapose the same with the physical numbers, the picture is different. IIP growth so far has been just 3.9% for the first eight months while the infrastructure industries have witnessed low growth of 1.9% in the first nine months.
It is hard to reconcile these numbers. Add the dimension of corporate performance and the picture is still disturbing with growth of just around 3% in net sales for the manufacturing sector – a trend seen for three quarters now. The disappointment gets even more palpable when we look at the overall investment rate which has kept declining to 29.4% in FY16 from 34.3% in FY13. Quite clearly the steam has been diluted.
The import substitution versus export promotion argument also does not find support here. Imports have grown at a negative rate due to lower prices as well as lower demand with industry still not growing at an accelerated pace. The talk on exports has been a major comedown as there has been a decline of 18% in the first 9 months, and it looks unlikely that there would be a turnaround any time soon.
Does this mean that we have jumped the gun? To answer this question we need to understand the concept of ‘Make in India’. The web site enumerates what it means where we focus on 25 sectors to provide a fillip to growth. The focus of the government is on easier policies besides incentives to various entrepreneurs including FDI.
The idea is to provide a hassle free doing business environment that can be leveraged for higher growth. This has entailed the identification for development of various national manufacturing zones. This is hence one of the most comprehensive plans launched by the government to kick start investment.
However, for this to materialize there has to be the right response from enterprise. Here it should be pointed out that there is a big difference between what is pledged or promised and what materialises when it comes to investment. We have seen several Investment Summits being launched by state governments where large amounts are spoken of ranging between Rs 1-4 lakh crore of investment.
Several MoUs are signed and the feeling one gets is that it were all to materialise, the overall investment environment will improve. However, as mentioned earlier, the gross fixed capital rate (investment) has been declining over the years. Quite clearly, most of these pledges are on paper. The ‘Make in India’ week is also going to showcase several states providing the platform for investment opportunities again and we need to be cautious when extrapolating these numbers.
The real challenge for this dream to materialize is funding. The government can go so far as to provide the right environment and facilities for bringing in such enterprise. But the initiative has to come from within. Today, manufacturing is operating with low capacity utilization rates of between 70-72% across various sectors.
With demand conditions being low – as is reflected by the low growth numbers in corporate sales and buttressed by low growth in industrial production including the core sector industries, there is some hesitancy in investing more at this stage, when interest rates are still high. Further, with global commodity prices coming down, and likely to remain at this level in 2016, the profitability of companies would still be under pressure.
Infrastructure is the area which can make the ‘Make in India’ dream work as it is not demand dependent. But again we have not witnessed much movement in the stalled projects and there are still issues of land, environment, and natural resources which are contentious. Further, private sector involvement has been limited which has put the onus on the government which is trying its best to spend within the fiscal space that is available at both the central and state levels.
How then should we view ‘Make in India’? It should be looked at as a comprehensive policy package to enable business – which has been partly successful in so far as our ranking has improved in the World Bank tables. But for the big push to happen someone has to spend and while pledging large amounts at investment Summits is encouraging, given our past experiences, we need to wait and see how much materializes into concrete plans that can be implemented.
We need to track new projects being implemented and stalled ones restarting to feel convinced that the campaign is resulting in core investment. Hence we have to be guarded when interpreting this campaign and separate the role of the government as an enabler to investment intentions of corporates and actual commitments. This would be pragmatic.
The writer is a chief economist at CARE Ratings, and his views are personal.