India’s manufacturing policy

Author - Baijayant 'Jay' Panda

Posted on - 1 October 2014

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This article was published on ‘The Times of India’ on 1st October 2014





Article Title:”Manufacturing Change: Policy, infrastructure and mindset hurdles must be removed for ‘Make in India’ to take off”

The launch of the ambitious ‘Make in India’ campaign to promote manufacturing in India could not have been more timely, coming as it does in the wake of the death of two iconic brands, Ambassador cars and HMT watches.

Recent months have undoubtedly seen a turnaround in India’s economy, a surge in investments and optimism in the markets. However, the prevailing positive sentiment rests less on specific policy changes so far – which till now consist of the signalling of intent, some trial balloons, and only the first few course corrections – and more on the belief that the new government means business.

Even as large investments are lined up from Japan, China and elsewhere, it is time to ensure that these (as well as domestic investments) don’t get stuck in the quagmire of red tape for which we have become infamous. India consistently fares poorly in global indices that rank economic freedom, such as those by the Heritage Foundation and others. The World Bank, in its 2014 rankings on the ease of doing business, puts India at 134th out of 189 countries.

While investments of all sorts have long had to contend with this landscape, the manufacturing sector has been especially penalised. With manufacturing contributing only 16% of India’s GDP – a third of China’s, and far lower in absolute terms – it is clear that this sector is not pulling its weight. That means tens of millions of missing jobs for a population that desperately needs them.

Of course, it can and has been argued that India’s forte is services, while China’s is manufacturing, and that we should make the most of this rather than fretting about it. Such arguments are couched in free market principles, against having an industrial policy, and in favour of letting the chips fall as they may, with each country making the most of its own competitive advantages.

There is a case for such an approach. Except that India’s manufacturing handicap is self-created, rather than due to any inherent shortcomings. Third world infrastructure, complex regulations, Byzantine procedures, counterproductive labour laws and a viciously extractive inspector raj, all contribute to disincentivising entrepreneurship. This is especially so in manufacturing. It should thus be no surprise that young Indian entrepreneurs, of whom there are plenty, mostly prefer to steer clear of this sector.

Ironically, Indians have long been lauded for their entrepreneurial skills in every corner of the world, and are increasingly respected for their contributions to manufacturing on a global scale. For instance, the automotive sector has long been a benchmark of a country’s manufacturing capabilities. Mahindra and Tata vehicles have been working their way up the value chain and now have significant presence in some parts of the world, as have other Indian companies in other industries.

This was a departure from an earlier era, when the likes of L N Mittal felt compelled in the 1970s to leave India to build their empires, in his case the world’s lar-gest steel company. But after a few years of both domestic and foreign companies scaling up in India, recently even the best-known Indian manufacturing companies, including the Mahindras and Tatas, have been finding it far easier to grow abroad than at home.

The mood seems to be turning optimistic again, but turbocharging the manufacturing sector is going to take some doing. For starters, there are clear lessons from past efforts, which have included numerous such initiatives over the decades. From Export Oriented Units, to SEZs, to industry-specific promotional schemes, there’s nothing that has not been mooted.

Though some of these measures have experienced some success (the automotive industry is again a good example), the share of manufacturing in GDP has remained stagnant for decades. Typically, poor implementation of policy thrusts is the chief villain. Take the 2011 National Manufacturing Policy, for example. A perfectly reasonable concoction, envisioning the creation of manufacturing zones with better infrastructure and updated labour laws, but with no follow-through on the ground. If only wishes were horses.

But the deeper problem beyond poor policy implementation is the overall ambience of obstructionism, even hostility. Decades of statist policies were built around suspicion of trade and commerce, with the private sector being particularly tarred as exploiters. And although early this century saw a few years of genuine entrepreneurs being lionised, political reverses, government apathy and the massive resurgence of crony capitalism saw a return to the earlier paradigm.

In the past few years, all entrepreneurs have again been viewed with suspicion for the sins of a few black sheep who conspired with rent seekers to fleece the system. But a country without entrepreneurs – the authentic kind, with dreams, ideas and passion – can never create enough jobs. India’s entrepreneurs have a tough enough time in any sector, but have bigger hurdles to overcome in the manufacturing sector, involving land, labour, infrastructure, taxes, inspections and the like.

So the ‘Make in India’ thrust will yield results if implemented vigorously. But for the manufacturing sector to contribute a much bigger share of India’s economy, an entirely new ecosystem is called for. For that, a lot of undoing is needed, of accumulated laws, procedures and attitudes, towards economic activity as a whole.