On its part, the government, with unbridled enthusiasm, did all it could to make it work. From reducing the corporate tax rate to revive investments, to improving the Ease of Doing Business rankings to attract foreign companies, to launching targeted Production-Linked Incentive schemes to imposing tariffs on imported goods so as to encourage domestic production and so on. Yet, the sum of all these small efforts didn’t yield success.
For instance, the massive cut in corporate tax rate to 25%, including a concessional 15% tax rate to new manufacturing units, failed to revive investments and spur growth. India did well in improving its Ease of Doing Business rank from 142 in 2014 to 77 in 2018, but critics carp that the improvement in ranking was largely due to a change in methodology and not necessarily due to deregulation of laws on the ground. Which is why even an improved ranking failed to work up investments.
Some of the other crucial reasons why Make in India failed include its ambitious target of an annual growth rate of 12-14%, which analysts believe is well beyond India’s current capability. Predictably, 2015 was the only year that recorded an annual manufacturing value added (MVA) growth rate of 13.1%, while in the remaining years, growth rate fell through.
Policy watchers also reasoned that Make in India policy relied way too much on foreign capital for investments, which hardly materialised. Worse, in the five years after Make in India was rolled out, even domestic investments continued their yawn fest. Private sector gross fixed capital formation fell from 23.1% in 2014 to 21.8% of GDP in 2019. Gross fixed capital formation fell to 28.6% of GDP in FY18 from 31.3% in FY14 and FDI in manufacturing sector remained sluggish.
Even before the government could give more thought to it, the 2019 slowdown besieged the economy, which was closely followed by the global pandemic that exposed the world’s dangerous over-reliance on China. As demand declined for general machinery, electrical equipment and automobiles across developed countries like Germany, Japan, and the US, India’s exports got a terrible whacking. As a result, in 2019, manufacturing output contracted for the first time in several decades.
By this point, perhaps, the government too realized that the Make in India policy in its current form needs much more than simple ingredients like a dash of lemon, salt and pepper to make a tasty meal.
Thus began India’s protectionist journey with the Atmanirbhar Bharat Abhiyaan scheme, which was loaded with a bunch of cheery things — higher tariffs for imported goods, subsidies through a Production-Linked Incentive (PLI) scheme, and measures to promote national champions. But in hindsight, the increased tariffs seem to be hurting domestic producers of exporter-oriented goods, while the PLI tool seems inadequate, as if digging a mountain with a needle.
What appears clear is that India’s intent of emerging as the world’s third largest economy needs a decisive pivot away from services to manufacturing, which can add value, create jobs and improve livelihoods. In fact, all the world’s largest economies gained the growth miracle with manufacturing at the forefront.
And if India wants to move up the manufacturing value chain, it needs to do multiple things simultaneously and counter intense competition from China, Taiwan, Vietnam, and others. According to some estimates, China accounts for about 32% of global manufacturing output, followed by the US at 16%, Japan at 6.5%, and Germany at 4.8%. India’s share stands at 2.9%.
Historically, the Indian manufacturing sector has been plagued by poor infrastructure, exorbitant logistics and transportation costs, a dearth of quality, and high-skilled labour. Traditionally, the share of manufacturing sector squatted at about 14-15% for several decades. As against building its own production lines, India relied on imports for several products. Even during the 2003-08 economic boom, industrial growth took a backseat as the country was riding high on the services tiger, hoping to emerge a as software services superpower.
But then the 2008 global financial crisis struck, followed by the Great Recession. China seized the opportunity, building on the manufacturing and technological prowess. India too made a humble attempt when in 2011, it rolled out the new National Manufacturing Policy, which too had a target of increasing the sector’s share in GDP to at least 25% by 2022 and creating 100 million additional jobs. It was this policy that was subsequently repackaged as Make in India in 2014.
Going by the history of industrialisation in the US, Germany, Japan and China, what’s certain is that the dominant sectors across all these countries include automobiles, mechanical engineering, chemical and electrical industries. Besides supporting industry-wise policies, these sectors also received favourable long-term finance, accessible markets and above all a conducive regulatory environment.
The interesting thing to note is that, all industrialized economies have a dominant services sector with a share of about 50-60% of the GDP each. In other words, industry accounted for only about 25%-30% of the GDP, a figure that India wants to achieve now. It’s not an impossible feat, but of course an ambitious one.