Waning ‘Make In India’ Warrants Import Substitution To Reboot Initiative – Analysis
Why is Make in India loosing steam? Was it eulogized with fanfare when it was launched in September 2014? Two years have passed and Make in India continues to reel under uncertainty. It did not make any headway in the growth of manufacturing trajectory. Production growth hovers around 2 percent, despite high GDP growth in the country (7 percent ). Exports has been flat and investment by the private sector has dwindled. Additionally, the stock market wades in volatility.
Given the lackluster progress, the government re-launched an import substitution program – a pre-WTO protectionist measure — to inject a new lease of life in the Make in India initiative. With a press note issued by Ministry of Urban Development, the government made it mandatory to procure railway equipment for metro projects from domestic sources. According to the policy, a minimum of 75 percent of metro coaches and critical signaling equipment are to be procured from domestic sources by the Central and State level metro project authorities.
To allure the investors, it said that the country would require 1,600 coaches over a three year period, in addition to 1,400 coaches, which are under different stages of procurement. Nine types of signaling equipment were identified for 75 percent mandatory procurement from domestic sources. Besides, indigenization of several metro functions has been prescribed, relating to communication system, operational and disturbances, time table preparation, control traction power and others.
Currently, there are eight metro rail transport systems under operation. The country is on metro rail service binge for rapid and environment free transport services. About 27 more metro services are under implementation and planning stages, which are to be launched by 2028.
At present, there are three companies to manufacture metro coaches in the country. The fourth Chinese company is setting up plant in Nagpur. Ironically, this time the import substitution is to protect none other than foreign subsidiaries in the country. Of the three, two are foreign subsidiaries.
Why has Make in India failed to accomplish the aspiration of the country, which aimed to make it a global hub for manufacturing? The fault lies with the road map of the initiative. The campaign missed policy initiative to put it in action. The policy makers targeted 25 industries at one stroke to perk up India’s overall manufacturing growth and raise manufacturing share in GDP from 15 percent to 22 percent by 2022. The 25 industries include both modern and traditional industries.
The challenges and approaches to develop modern and traditional industries are different. While the development of modern industries embodies sectorial development of component / parts and assembly operation, coexisted in the manufacturing processes, the traditional industries warrant for refurbishment to cope with changing pattern of demand. For example, challenges for development of modern industries like electronics, automobile, telecommunication are different from the development of traditional industries like textiles, agro-based and handicraft industries
The Make in India campaign was silent on different approaches and policy drives required for the development of modern and traditional industries. While development of traditional industries requires re-furbishment as a first step, owing to changing pattern of the demand, development of modern industry requires creation of an harmonious relation between SMEs (small and medium scale) and assembly operating companies. To this en , development of traditional industries requires policy support, including fiscal incentives and marketing support and modern industries require policy support for R&D and development of contract manufacturing.
Further, the attempt to develop the 25 industries at one stroke missed the priority base development. Today, with digitization gaining prominence in ease of doing business, electronic manufacturing should have been given more priority than traditional industries.
The campaign was made based on the existing policies. It did not offer any new fiscal incentives. It was acknowledged by a Parliamentary panel , which assessed the impact of Make in India on SMEs. It said that appropriate approaches should be made for the revival of capital goods industry, which is the main pillar for growth of manufacturing. It recommended for suitable subsidy to be given for the growth of capital goods industry.
Fiscal incentives have been the core demand of the investors. At 33 percent corporate taxes and a 26-28 percent custom duty, business taxes are one of the highest in India. The campaign highlighted ease of doing business, without specifying as to how to do away the main barriers such as land acquisition, non- transparent tax system, fiscal incentives and reluctance to open multi-brand retail to the foreign investors. Even the developed nations USA and Japan, who are on the binge to re-built America First and Invest Japan, are contemplating fiscal incentives .
Tax incentive has always been the main tool for China to attract foreign investment. In the initial stage of reform, China granted special tax incentive to the foreign investors over the domestic investors. China continued fiscal incentives as an important tool in the second stage of reform also.
The Government reposed high hope on defense sector as the engine for Make in India. Defense manufacturing was opened to foreign investment. India is the biggest importer of defense equipment in the world. It spends a big chunk of Budget expenditure for the purchase of defense equipment. Despite these, opening FDI in defense received lukewarm responses from the foreign investors. During the past two years, insignificant amount of FDI flowed in defense manufacturing.
Will the return of import substitution provoke pro-globalization? The first shock wave will go to China. Chinese President Xi Jinping is reckoned the global leader for driving the globalization after USA reverts to protectionism under the Trump administration. At the Davos summit, he taunted against anti-globalization saying “blaming economic globalization is not in consistent with reality”, presumably throwing salvo to US President Donald Trump.
China is the biggest trade partner of India. At the same time, China is the major creator of India’s wide trade deficit. One-fifth of India’s world trade deficit is engineered by Chinese dumping of goods. To this end, India’s return to import substitution, presumably meaning adoption of protectionism, will likely impact on the new trend of India- China economic engagement. Either the import substitution movement may raise ire from Chinese President, or it will elevate Chinese investment in India.
(Views are personal)
