Will 'Make in India' be 'make in few states'?

 

India received $31 billion in foreign capital flows, while China was ranked second at $28 billion, with the US at $27 billion, coming in third. 

 

These numbers, however, are expected investments, and there is some discrepancy between this and data released by the government. Nevertheless, it sounds like good news for the government’s 'Make In India' thrust. But the real story lies beyond the numbers, in the many looming challenges that go beyond the 'ease of doing business' issues - a daunting task in itself.

 

Things are changing around the globe. However, India being ranked higher than China in FDI flows has limited meaning, given that China is reeling under excess capacity in many industries and is cutting back on production.

 

China recently announced it was laying off 1,00,000 workers in a large coal company to control recurring losses. Put differently, China has perhaps already got most of the FDI it wants, or can absorb.

 

On the other hand, India, too, is reeling under excess capacity – 60-70% utilization in industries like auto and cement. A study by rating agency Crisil says low capacity utilization is the key challenge faced by most industrial sectors; for 10 of 12 sectors, capacity utilization is lower than their five-year average.

 

Matters are so dire that many industries – perhaps for the first time in 15 years – are fighting for protection by asking for higher import tariffs. Partly, this is because of fears of dumping by countries like China. But this is also because of the Indian industry’s inability to compete with imports. Steel and aluminium are classic examples.

 

The inability to compete is usually linked to costs. How can I sell below or at cost, and survive ? The solution is obviously to become more productive, make more steel, for instance, at the same cost of production. But that is easier said.

 

The Indian industry has to reckon with comparatively poor infrastructure, high cost of inputs, like power, and high rates of interest. So nothing that can be solved in a jiffy.

 

Finally, there is an overall demand slowdown as well, across sectors, both global and Indian. Remember that the reason commodity prices are falling like a rock is because demand has slipped sharply. It could be argued that low prices can spur a demand rebound but that is not always the case.

 

Now what is the opportunity? China’s share of manufacturing in GDP is 31%, while India's is 17%. And China’s GDP is $10.3 trillion, while India's is $2 trillion. So China’s manufacturing GDP is larger than India’s GDP. And a large part of China’s manufacturing is export oriented.

 

The flip side is that while there is an opportunity to manufacture more for growth markets like India and Africa, existing Chinese capacity or, for that matter, India is sufficient to meet most demand in the near future.

 

Yes, things will turn at some point. Demand will pick up and industries will come back to producing at capacity. There are two concerns here. First, it may not come back the way we knew it. It is important to understand that manufacturing itself is undergoing radical shifts, as it becomes more automated and robotics-driven, and thus, less job creating. Second, the present delays compound into further delays in the investment cycle.

 

The Crisil study says, private capital expenditure continues to slide, and will fall another 8% this fiscal. It further adds that meaningful capex is only likely to happen around 2017. The good news is that public capex is growing at 2%.

 

This is evident in the moves by the government, to take over road projects and build them on their own rather than going in for painful public-private partnerships; or announcements by the Indian Railways that it is going in for massive investments.

 

So, 'Make In India' in the real sense is a while away.

 

 

This is not to say all industries are in the doldrums. Some are doing well, like paper. Sectors like defence which are in the sunrise category might do well too, assuming, of course, the processes become simpler.

 

Now let us look at ease of doing business.

 

'Make In India' as a campaign tries to attract investors but also targets government departments at the central and state level, whose job it is to make it easier to do business.

 

This is a big challenge. Interestingly, India has just jumped 16 places in the World Economic Forum’s global competitiveness ranking, now at 55 out of 140 countries, in contrast to 71 last year. But before you bring out the bubbly, recall that India was at 43 in 2007, being its best year on this ranking.

 

Moreover, as we all know, most ease of doing business issues are faced at the state or city level. In a recent joint meeting with industry representatives and bureaucrats, Madhya Pradesh Chief Minister Shivraj Singh Chouhan said they had identified 150 pain points in getting approvals to set up an industry in his state.

 

In many cases, the pain points were derived from multiple approvals from the same authority, for instance, laying a high tension power line at the factory. Pruning this list was, and is a major challenge, as each department fights to hold its ground and authority.

 

Madhya Pradesh, like a handful of other states, at least wants to fix the problem, and is seemingly working hard on it. It knows that agriculture (which has done well) or services cannot create jobs for all of its youth.

 

The same cannot be said for most other states in the country, where there are few visible attempts to do the kind of heavy plumbing this problem will require to fix.

 

To that extent, while 'Make in India' is a rallying cry for the country, manufacturing investments will continue to flow into states where things have historically moved faster, like Tamil Nadu, Gujarat, Maharashtra, Madhya Pradesh and Andhra Pradesh.

 

'Make In India' could thus be confined to making in a few states. Which throws up its own challenges, as decades of internal economic migration has shown, and thus, is an area of concern.

 

Perhaps we have one more opportunity in waiting for the macro-economic fundamentals to improve; we can use this time as a blessing to attack the hurdles on the ground with greater intensity. So when the cycles turn, we are ready for them.