Question to Modi as he kickstarts Make in India week: Will the jamboree revive investment cycle? - Firstpost
Firstpost

Question to Modi as he kickstarts Make in India week: Will the jamboree revive investment cycle?


Prime Minister Narendra Modi’s week-long Make in India campaign in Mumbai holds a promise to make the country the world’s manufacturing hub.

ANI reports that the 'Make in India' Week is touted as the largest business expo hosted by the country. At least four MoUs worth at least Rs 64,000 crore are expected to be signed on the first day of the event. As many as 2,500 foreign delegates and 8,000 representatives of Indian companies are participating in the event.

According to reports, between September 2014 and November 2015, the government received Rs 1.20 lakh crore in proposals from companies interested in manufacturing electronics in India. Several other companies too have committed investments in the country.

PM Modi arrives in Mumbai

PM Modi arrives in Mumbai

As far as the launch goes, Modi deserves credit for showcasing Make in India (originally launched on 5 September) as the next big manufacturing revolution among the merging markets. There can’t be a bigger PR event that any government has done so far and something Modi has successfully experimented in Gujarat. There is no second thought on the fact that the country has never seen a better salesman than Modi to hard sell the India story to foreigners.

Everything looks exciting until this point.

But, the past experience suggests that investment commitments have hardly translated into real investments in the country. The big question here is this: Beyond the mega-launches, can the Modi government convert the commitments to actual investments to give a leg up to the country’s manufacturing sector? India badly needs fresh investments at this stage to take off on the growth path.

Promises and action (in numbers)

“The picture obtained is that investment has not picked up significantly across the board and the higher levels of proposals and announcements have been concentrated in specific sectors. Industry is still pursuing a wait-and watch approach given that their own performance has been subdued now for the three quarters of this financial year,” said a February 5 analysis of rating agency CARE on the investment climate in the country. In terms of overall new investment announced, there was a decline of 32 per cent. This decline was witnessed across both the government and private sectors, it said.

To take a closer look at the numbers, in the first nine months of FY16, total private investments in the country declined to Rs 3.5 lakh crore compared with Rs 4 lakh crore in the corresponding period last year, while investments by the government declined to Rs 1.9 lakh crore as against from Rs 3.98 lakh crore.

The total number of investment proposals for the first 8 months of the year was higher at 1,366 during FY16 compared with 1,074 during the same period of last year. However, in value terms the proposed investment was lower at Rs 2.02 lakh crore as against Rs 3.22 lakh crore during the same period of last year. Hence, there has been a dip in the proposed investment as per the IEMs filed with the DIPP, CARE said.

The Centre for Monitoring Indian Economy (CMIE) estimates that announcement of proposals to create new capacities declined sharply (74 percent) in the third quarter of fiscal year 2016. Only 383 projects were announced in the quarter with an estimated investment of Rs 1 lakh crore, which is the lowest in at least five quarters

The CSO data for the first half of the year, there was a decline in the gross fixed capital formation rate from 29% in H1-FY15 to 28.1 per cent in the first half of FY16 in current prices, while in real terms, there was a decline from 30.3 per cent to 29.9 percent during this period. On the other hand, banks too have been lending mostly to retail segment not industries on account of higher risk perception, stress on bank balance sheets and capital scarcity, choking funds to companies.

Problem of commitments not turning to actual promises is not a new thing in India. That has been so for at least 4-5 years. An earlier study by the same agency tells us the difference between what was promised and what was actually fulfilled in the last five years (2011 to May 2015).

Only about 8 percent of the investments promised across industries have been actually made. Majority of the promises have remained on the paper. The actual investments made across all industries in the last five years stand at Rs 2.71 lakh crore, while Rs 31.93 lakh crore investments were proposed across 11,784 projects in the country.

The to-do list

This doesn’t mean Modi’s Make in India plan will meet the same fate. But, there are a few things that he needs to take care of to ensure that the initiative will not be a flop show.

For one, fast-track reforms: It is highly critical for Modi to change the investment climate on the ground by pushing crucial reforms. One of the major turn-offs for the investors coming to India has been the myriad tax laws, poor infrastructure, availability of power and water and complex labor laws. As industrialist Ratan Tata pointed out recently, the government is not doing enough work on the ground, resulting in a bigger-than-expected delay in reviving the investment cycle. The truth is foreigners are still hesitant to cross the border and invest in India.

“So the real test comes when they (foreign industries/ investors) are making their due diligence to decide whether India is the place to invest, not just on the basis of Mr Modi's promise,” Ratan Tata said in an event recently. Modi needs to push critical reforms such as the Goods and Services Tax and make labour laws easier to attract investments. Clearly, time is running out for him to expedite the reforms agenda building a consensus with Congress-led opposition.

Secondly, as RBI governor Raghuram Rajan cautioned, Modi must tap the huge potential in the domestic market, rather than relying on an exports-driven model to ensure Make in India is primarily for Make for India. In a slowing world, this is even more critical.

Thirdly, the success of Make in India, beyond the big bad announcements, will depend upon how successfully Modi can take state governments, including the non-BJP ruled states, on board. At the implementation level, the states have a key role to play in making the programme a great success.

The short point is this: It’s easier to showcase mega shows but the real challenge lies in implementation level, which is key to Make in India a major success. Remember, big manufacturing countries in the world such as China didn’t really ‘launch’ a manufacturing revolution, they simply started doing it. The success of Make in India lies in how effectively the government manages execution at every step.