Friday, January 2, 2015

Making ‘Make in India’ happen / Ravi Venkatesan

At this moment, the Prime Minister’s “Make in India” campaign appears to be exactly this — an imaginative marketing campaign. But there is much thought and even more work that is required to convert this to reality.
The theory behind “Make in India” is as simple as it is compelling. India must become a manufacturing powerhouse in order to gainfully employ its demographic dividend; there is no choice here. Fortunately, we have many natural advantages including a big labour pool and a large domestic market. In addition, with China’s competitive advantage in manufacturing eroding, India has the opportunity to take some share of global manufacturing away from China. All we have to do to improve the ease of doing business in India are these —stop tax terrorism, improve infrastructure, reform labour laws, invest in skills development, make it easier to acquire land, implement Goods and Services Tax (GST) and fast track approvals. Voila, we will take our rightful place as the world’s factory alongside China.
Energy factor
This is an attractive thesis that has a lot of merit. A simple step of making it easier to do business will make a huge difference to India’s manufacturing competitiveness. It is one plank of a manufacturing strategy. India ranks 142 on the World Bank Index; China is ranked 90. If we were to improve by just 50 places, it would be a huge perceptual breakthrough. However, this is not a manufacturing strategy in itself. As Reserve Bank of India (RBI) Governor Raghuram Rajan correctly and controversially pointed out, much has changed in the world since China elbowed itself into becoming the world’s factory two decades ago. The nature of manufacturing is changing. Low-cost automation and robotics are making pure labour cost arbitrage less important. Lead times and a flexibility of supply chains are far more important, leading many companies to move manufacturing back closer to the big markets, the United States and Europe. Energy is the new labour in the sense that the cost of energy will significantly drive where things are made. Here, the U.S. with its huge new shale gas reserves has a big advantage. Developed countries are also realising how crucial local manufacturing is to jobs and to having stable, prosperous societies and so there is an attempt to reverse outsourcing and revive local manufacturing by embracing new technologies and innovations such as 3-D printing and the “Internet of things”.
For an industrial policy
To become a manufacturing powerhouse, India needs a manufacturing strategy, otherwise known as industrial policy. The idea of an industrial policy is out of vogue these days. It is seen as ineffective at best and even retrograde, running contrary to the idea of free trade. This is patent nonsense. Japan, Korea, China, Germany have all prospered by having a clear industrial policy and vigorously implementing it. The U.S., the United Kingdom, France and Italy have seen themselves deindustrialise by not having a clear industrial policy and are trying hard to course-correct this mistake.
There is a successful precedent even in India; our success in IT services was not an accident. It was the result of clear-eyed policies driven by the Department of Electronics, which included reducing import tariffs on hardware and software to zero, setting up software technology parks with tax incentives, and improving connectivity. Policy has always mattered and when it comes to manufacturing competitiveness, India must have a clear industrial policy that spells out priority sectors and how we will build competitive advantage in a way that is consistent with our obligations to the World Trade Organization (WTO).
Building on advantages
India’s industrial policy must recognise where we have important competitive advantages. India is quite uncompetitive at low skill manufacturing. On the other hand, it is good at making complex things which require skilled labour and frugal engineering. Despite all its shortcomings, India remains a very competitive manufacturing location for sophisticated things such as construction machinery, cars and automotive components and diesel engines. It is no accident that companies such as JCB, Cummins, Deere, Volvo, Hyundai and Ford are using India as a major export hub.
We must focus on building competitive advantage and global scale in sectors where we have a large domestic market and certain inherent capabilities. Strategy is all about making choices. Here, five priority industries come to mind. Defence, because we are the world’s leading arms importer. Localising what we buy as a condition for all defence deals along with a willingness to allow majority foreign ownership can turbocharge our local defence industry. The second critical industry is electronics hardware. India imports $45 billion of mobile phones, computers and communications hardware; by 2020, this is projected to grow to $300 billion and exceed our oil import bill. This is unsustainable. We have to create policy incentives to create a local electronic hardware manufacturing ecosystem. Since most component suppliers, Original Equipment Manufacturers and Original Design Manufacturers are Chinese, this will necessarily imply incentivising Chinese companies to establish factories in India. The size of our domestic market should make this possible. Concerns about security are misplaced; all our personal computers, cellphones and a lot of switches and routers are already made in China, so we are conceding nothing. The third industry is construction. India will invest a trillion dollars over the coming years in improving infrastructure. We need to create incentives that not only spur investment in manufacturing materials such as cement and steel but also construction equipment, locomotives, power generation equipment and so on. Everything we install should be made in India. The fourth is health care. India’s generic pharmaceutical industry is world class. We must not concede on intellectual property rights that neutralise our advantage. India is also exceedingly good at frugal innovation in medical devices such as low cost X-ray and ECG machines. We have a real shot at being a world leader in innovation and manufacturing in this space. Finally, agro-industries. We are one of the largest agricultural nations. A third of what we grow just rots and spoils. Investing in agro-industries such as food processing and establishing a reliable cold chain would make a huge difference in terms of rural employment and food security. If we had to pick just five industries where we want to bootstrap a strong competitive advantage it would be these. In other industries, whether it be textiles, toys, or automotive, we need to ensure that we do not disadvantage local manufacturing.
Creating ecosystems
Another critical strategic question is this: where do we want to make things? It is difficult to make a country the size of India into a uniformly attractive manufacturing location. Even China started its manufacturing odyssey by creating a few oases in the form of four special economic zones which were remarkably easy places to manufacture in. Where is India going to start its global odyssey? Manufacturing is all about hubs that are ecosystems for innovation, specialised skills and supply chains. Where will India’s hubs be for pharma, for defence, for electronics, for machinery and construction equipment? How do we catalyse these hubs by creating world-class academic institutions and skills training institutes? What incentives will attract the world’s leading companies to establish global innovation and manufacturing centres in these hubs? Pune, Chennai, Bengaluru and Delhi are already emergent hubs but what will enable them to scale up to compete with Shenzen and Tianjin?
To become a manufacturing nation, India has to quickly move beyond rhetoric to create a clear strategy and favourable policy environment for manufacturing to take off. The government has chosen to quietly dismantle the sclerotic National Manufacturing Competitiveness Council (NMCC) but it needs to foster a more vibrant think tank in its place. A close dialogue and partnership between government and the private sector, both domestic and foreign, is critical. Indian companies along with Chinese, Japanese, German, American and Swedish companies are all vital partners and we must create an environment that is open and welcoming. For this, the right leadership of this vital mission is critical. There is a clear and short-lived window of opportunity to become a manufacturing nation. We must not squander it.

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