How to Make in India 2.0

There aren’t many silver linings for the economy in the long pause of lockdown. But there may be opportunities for India in the months ahead, particularly in manufacturing, as the world makes an at­tempt to reduce its dependence on a single factory, China. Now is the time to reflect on whether we have the ecosystem to capture any upside. The honest answer is no. The fact is that at least some labour-intensive manufacturing has been exiting China for several years, largely because of rising wages in what is now an upper middle-income country but very little of it has come to India, choosing Vietnam and Bangladesh instead. If the government is serious about Make in India 2.0, as is being widely reported, it must repair its policy framework.

Before policies are refreshed, there are some overarching principles policymakers must accept so that the latest attempt to lure manufacturing to India is more successful than previous efforts. First, Make in India for the world. The size of the global merchandise exports market is six times the size of India’s entire economy and the ambition must be to capture a big share of that. This will also help avoid the temptation of converting Make in India into an autarkic, pre-1991 type of exercise where efficiency and global competitiveness were given short shrift.

Second, trust private enterprise. India does not have the state capacity or the incentive structures to allow the public sector to play even a supporting role. Of course, there will be bad apples and they need to be handled with zero tolerance. But policy cannot be made on a foundation of distrust. That only leads to complexity, overregulation and, frankly, an increased probability of bad apples manipulating the system.

Third, do not fear scale. India’s political economy is traditionally suspicious about big business and big profit and romanticises MSMEs. Part of the reason for that is that employment is disproportionately higher in the latter. But this is an outcome of perverse policies over decades. Globally, it is large enterprises and medium enterprises that generate the largest and highest quality employment. India’s micro enterprises can never generate well-paying jobs.

Fourth, do not view firms as sources of government revenue. Policy must only focus on how to maximise production and jobs. Government revenue is a by-product of success. If it is put upfront, it impedes success. This has been recognised by the government, at least for new firms, which will only pay a corporate tax of 15 per cent but there is always a temptation to impose cess or find other ways of additionally taxing profitable companies to meet revenue targets.

After principles, come policies. Some require serious reform as a non-negotiable. Consider the following three. First, land acquisition. There are reports that the central and state governments are putting together land banks, perhaps from lands that are already owned by governments or government entities. That is very good. But if we want to manufacture on scale, hundreds of square kilometres of land are required for industry, preferably in areas that are either near ports or have good connectivity to ports. This is admittedly a challenge in a densely populated country but big plots must be made available.

Second, the cost of two key inputs: power and transport. For long, India has subsidised farmers and retail consumers of power by overcharging industry. This is precisely the opposite of what China does. This distortion needs correction. So far, even captive power plants have not provided a definitive answer because of uncertainties of coal supply from Coal India. The recent decision to permit commercial coal mining by domestic and foreign investors is a positive change but may take a while to be implemented fully. Similarly, Railways has subsidised passengers by charging extra for freight. This needs to change.

Third, efficiency of ports. The turnaround times and bureaucratic procedures at major, government-owned Indian ports are still much worse than international best practices. There is considerable scope to improve. This is important for exports, but it is also important for manufacturing per se because at least some inputs will be bought from other countries. That is how regional and global supply chains work.

India requires other important re­forms, including in labour and capital. But they might not be deal-breakers for investors in the way the three listed above are. It is reasonable to assume that the biggest firms can always raise capital from abroad. And contract employment is permitted in the current labour regime. Needless to say, India will be served well by comprehensive capital and labour re­forms but it is important to sift the necessary from the desirable.

There is a path to Make in India 2.0. It must be very different from Make in India 1.0.

The author is chief economist, Vedanta