Long Read
Outlook Business Team
The Outlook Group
New Delhi, August 14, 2022
Through his latest book Journey of a Nation: 75 Years of Indian Economy-Re-emerge, Reinvest, Re-engage, author Sanjaya Baru has outlined the 75-year journey of an independent India’s economic rise, a journey that started even before its independence
A 75-year-old India has economically come a long way on its own since its independence.
The seeds of swaraj (self-rule) were sown at the beginning of the twentieth century itself with eminent names like Dadabhai Naoroji, Gopal Krishna Gokhale, Mahadev Govind Ranade, Bal Gangadhar Tilak and others launching the swadeshi movement, a self-sufficiency drive with a focus on goods made in India and domestic production, against the British rule.
For Mahatma Gandhi, swadeshi was the heart of his call for swaraj. The same sentiment has taken a different form through the Narendra Modi government’s ‘Make In India’ initiative today.
From entering the turbulent yet momentous early decades as a free young nation and blooming at the turning point in the 1990s to upgrading in the transformative first two decades of the 21st century, Baru walks the readers through it all.
Performance since market reforms
In the initial years of trade and industrial policy liberalisation, after 1991, higher economic growth translated into a higher share of trade and industrial output in national income.
The share of manufacturing sector output in the GDP went up from 15.68% in 1991 to 17.87% in 1995, remaining around 16% to 17% over the next decade.
Even more impressive was the rapid increase in the share of foreign trade in national income. The total trade (exports plus imports) in goods and services went up as a share of GDP from 17% in 1990 to 48.4% in 2007, the year before the transatlantic financial crisis of 2008. By 2014 it exceeded 50% of national income. This impressive rise in the share of foreign trade drew attention to the growing competitiveness of Indian manufacturing and services because it happened against the backdrop of a sharp reduction in average tariffs.
The unweighted average applied tariff on manufacturing in 1990 was as high as 145% this was brought down to 14% by 2005.
Encouraged by this trend, India entered into several bilateral and regional preferential trade agreements (PTAs). India offered unilateral trade concessions to less developed economies in its neighbourhood and actively engaged East and Southeast Asian economies.
India joined the multilateral trading system in 1948 as a founder-member of the GATT. The first regional trade agreement of which India became a member was the Bangkok Agreement in 1975.
In December 1998, India signed its first bilateral free trade agreement (FTA) with Sri Lanka, officially called the India–Sri Lanka Free Trade Agreement (ISFTA), which came into force in 2001. Subsequently, India implemented the South Asian Free Trade Agreement (SAFTA) in 2004, the Comprehensive Economic Cooperation Agreement (CECA) with Singapore in 2005, the ASEAN–India Free Trade Agreement (AIFTA) in 2010, the India–Korea Comprehensive Economic Partnership Agreement (CEPA) in 2010, the India–Malaysia Comprehensive Economic Cooperation Agreement (CECA) and the India–Japan Comprehensive Economic Partnership Agreement (CEPA) in 2011.
Impact on export trade
What remains fairly ambiguous is the impact of these trade agreements on India’s export trade. Critics have pointed out that after the conclusion of a free or preferential trade agreement India has found exports to the concerned market not growing as fast as imports from there.
Even within her neighbourhood, India’s share of trade has remained low. To facilitate India’s trade with its neighbours, the SAARC Preferential Trading Arrangement (SAPTA) was signed in 1993, followed by SAFTA almost a decade later in 2004 (which came into force in 2006).
SAFTA has been hobbled by political tensions between India and Pakistan, its two largest members. In 2014, the Narendra Modi government called for a review of all FTAs and PTAs and stopped all further negotiations. However, with the trade-to-GDP ratio dropping sharply after 2015, going down well below 40 per cent by 2020, the government opted for a fresh look at trade policy and has renewed trade negotiations with several countries, concluding an FTA with the United Arab Emirates in February 2022.
The main concern shaping trade policy remains the low share of manufacturing in the GDP, stuck at around 17%. Despite the Green Revolution and agrarian prosperity in some parts of the country, the overall size of the home market for manufactured goods remained limited.
The slow growth of domestic demand, foodgrains price inflation, deficient supply of raw materials for industries, and the policy constraints imposed by a bureaucratic State contributed to major industrial growth stagnation till the 1980s.
India’s initial unwillingness and the subsequent slow probing of the global market meant that the export-based industrialization of East Asia did not take root in the country. The change in the domestic policy regime after 1991 did help but by the turn of the century, it was evident that industrial growth was not picking up.
Critics of trade liberalisation blamed this on import competition. For the manufacturing sector, the simple average tariff had fallen from 126% in 1990–1991 to 36% in 1997–1998 and then to 12.1% in 2014–2015.
New Manufacturing Strategy
It was against this background that Prime Minister Dr Manmohan Singh set up the National Manufacturing Competitiveness Council (NMCC) in 2005.
In its 2006 report, the Council advocated a new manufacturing strategy. These ideas found their way into what the Planning Commission called The Manufacturing Plan: Strategies for Accelerating Growth of Manufacturing in India in the 12th Five Year Plan and Beyond.
The document called for a ‘paradigm shift in industrial policy and suggested various policy measures aimed at increasing the share of the manufacturing sector in the GDP from 17% to 25% by 2022. The strategy outlined in this document was subsequently relaunched by Mr Modi as the Make in India Programme.
The Twelfth Five-Year Plan recognised the challenge of ‘jobless growth in the industrial sector and suggested that the ‘architecture of industrial policy’ needed to change to boost growth.
Instead of a hands-off approach of the reform era, India would need to learn and adopt the approach of post-war success stories (Japan, South Korea, China) in growing competitiveness and scale of their manufacturing: close coordination between producers and government policymakers, with governments playing an active role in providing incentives for domestic industrial growth and in relieving constraints on industrial competitiveness.
The National Manufacturing Policy, mooted in 2011, sought to increase ‘depth’ in manufacturing, enhance the global competitiveness of Indian manufacturing through appropriate policy support and ensure the sustainability of growth, particularly regarding the environment. Achieving a greater depth in manufacturing entails ensuring a higher level of value addition within the country.
Make in India Programme
This requires focusing on a few key areas like the heavily import-skewed capital goods sector, technological advancements in nearly all manufacturing sectors, and a focus on improved domestic research and development. All this marked a significant change in India’s approach to industry/manufacturing in the ‘era of planning’ that continues today under the new rubric of ‘Atmanirbhar Bharat.’
The Make in India Programme, launched on 25 September 2014, was nothing but a revised version of the National Manufacturing Policy 2011, of the Manmohan Singh government.
The symbolic lion, signifying the strength of Indian industries, made out of cogwheels, was launched as the power mascot of the Make in India campaign. With India inviting countries to ‘Come, Make in India’, the programme was anticipated to change the face of the manufacturing sector. To impart to the campaign a trade-promoting angle, the Prime Minister rephrased the programme as ‘Make in India, Make for the World.’
A multitude of policies aimed at easing the industrial processes was initiated across subsectors. While the primary idea of Make in India was not new, given our prolonged history of hustle with factory production, it aimed to make India the global hub of production.
The entire programme was based on three pillars: increasing the annual growth rate of the manufacturing sector to 12% to 14%; creating additional 100 million manufacturing jobs and increasing the manufacturing sector’s contribution to GDP to 25% by 2022. (The target date was subsequently pushed to 2025).
Through this initiative, foreign manufacturers were invited to set up their production units in the country and not just market them. With a prime focus on 25 sectors to boost manufacturing, the programme was launched amidst a lot of hype and attention. The campaign aims to cover a myriad of objectives, including the facilitation of easy investment, provision of an impetus for innovation, skill development, best-in-class manufacturing infrastructure and, most importantly, the creation of employment avenues.
The lion has not roared
When the programme was launched in 2014–2015, the condition of the manufacturing sector was in shackles, with a mere, stagnated contribution of 17% to the GDP. The growth impetus through the service sector was also reaching saturation for employment absorption. The time called for stringent actions for the manufacturing sector, thus building up the rationale for Make in India.
The rationale behind the ‘Make in India’ campaign rests on the need for India to become a manufacturing powerhouse to gainfully employ the potential demographic dividend.
To accommodate the 300 million people who will join India’s workforce between 2010 and 2040, each year 10 million jobs must be created.
The decision of many developed market economies to ‘decouple’ from China, that is reduce their dependence on supply chains linked to China, provided India with an opportunity to seek relocation of foreign firms away from China into India.
This process is still in its early stages, with several American and European multinationals opting to first relocate to Southeast Asian countries before looking at the India opportunity.
The policy was well structured, outcome-oriented, and a significant initiative to restart the engine of India’s manufacturing wagon; however, as some critics have pointed out, ‘the lion has not yet roared.’ One of the main objectives of the policy, to increase the share of the manufacturing sector in the GDP to 25%, remains nowhere near being met, with this share, declining to below 16 per cent in 2020.
Negligible growth
The Index of Industrial Production (IIP) showed negligible growth of around 3% over six years, 2015–2021, clearly implying a lack of impetus for the growth of manufacturing productivity. While India accounts for nearly 85% of the total Foreign Direct Investment (FDI) inflows in South Asia, the manufacturing sector attracts only a quarter of these inflows, with a bulk going into the services sector. A large part of the foreign investment that India has been able to attract has gone into the services rather than the manufacturing sector.
Moreover, there has been very little ‘greenfield’ investment, with a large part of FDI inflows focused on buying up Indian entities.
The Covid-19 pandemic administered further shocks to the manufacturing and services sectors, both the supply and demand side. Heavy retrenchment, contraction in factory outputs and lack of demand hit the already suffering manufacturing sector.
In 2018 itself, the Periodic Labour Force Survey (PLFS) of 2017–2018 showed that the unemployment rate had touched a 45-year high at 6.1%.
The employment situation in manufacturing became worse after 2020.
Production Linked Incentives Scheme
Concerned about the slow progress of the Make in India initiative and the inadequate competitiveness of Indian manufacturing at a time when the global trading environment was becoming increasingly protectionist, the government launched a scheme to facilitate focused development of critical industrial sectors. Called the Production Linked Incentives scheme, this new experiment in what economists call ‘industrial policy’ was launched in March 2020. Initially, the scheme sought to promote mobile and electric components manufacturing, pharmaceuticals (including active pharmaceutical ingredients) and medical device manufacturing. It was later expanded to include automobiles and auto components, drones and drone components, advanced chemical cell batteries, electronics hardware and information technology hardware, food processing, speciality steel, white goods and solar photovoltaic modules, telecom and networking products, and textiles and apparels.
The focus of the PLI scheme has been on promoting sunrise industries, new technologies as well as labour-intensive manufacturers. The government hopes to plug the Indian industry into the global value and supply chains through this initiative. It is, therefore, a trade and industrialization policy woven together. The scheme has been conceived such that government-funded financial incentives are provided only after the relevant investment is made, employment has been generated, and production and sales targets are achieved.
The PLI scheme has incentives specially targeted at the MSME sector. PLI, it is hoped, would help reduce imports, build domestic manufacturing capacities, and promote exports.
Plans to boost investment
Faced with the problem of slow industrialisation and, worse, a decline in the rate of private sector capital formation, the government has been forced to devise strategies to boost investment in industry, especially the manufacturing sector.
The share of gross fixed capital formation in the GDP increased from around 24% in the early 1990s to a peak of 36% by 2007–2008 and then began to decline, touching a low of 27% in 2020.
Over the past couple of decades, most policy efforts have been aimed at reversing this trend and reviving industrial sector growth. While the competition from China and other export-oriented economies has partly contributed to the problems of domestic industry, there is also a feeling among Indian businesses that despite the so-called improvement in the ‘ease-of-doing business’ in India, the domestic environment is still far too challenging for industrial development.
The Make in India programme and the PLI scheme have been policy responses aimed at altering the policy environment. More recently, through the Union Budget statement of February 2022, the government has once again tapped into the earlier, what may be called the ‘Nehruvian,’ strategy of public investment-led growth in the industrial sector.
Union Finance Minister Nirmala Sitharaman explained the new policy of seeking to ‘crowd-in’ private investment by undertaking public investment as follows:
Capital investment holds the key to speedy and sustained economic revival and consolidation through its multiplier effect. Capital investment also helps in creating employment opportunities, inducing enhanced demand for manufactured inputs from large industries and MSMEs, services from professionals, and farmers through better agri-infrastructure.
The virtuous cycle of investment requires public investment to crowd-in private investment.
At this stage, private investments seem to require that support to rise to their potential and the needs of the economy. Public investment must continue to take the lead and pump prime the private investment and demand.
The echoes of the Bombay Plan
In that statement, we hear, once again, the echoes of the Bombay Plan, the Mahalanobis Plan, and the ‘mixed economy’ model of public-private partnership.
Once again, the State has intervened to push capitalist industrialisation forward. Even as the government stepped in to invest in infrastructure and industry, it privatised Air India and opened up defence manufacturing to private investment.
The Finance Minister’s Budget speech also claimed that the PLI scheme covering 14 sectors would achieve the vision of Atmanirbhar Bharat, creating 60 lakh new jobs and stepping up production by `30 lakh crore during 2022–2027. The Finance Minister also announced an increase in tariffs across several sectors, with a focus on products manufactured by the MSME sector. In that sense, the new industrial policy is not a return to the old industrial policy. However, it is a variant of the same model of State-assisted capitalist development that India has followed since Independence.
(Excerpted from Journey of a Nation: 75 Years of Indian Economy-Re-emerge, Reinvest, Re-engage by Sanjaya Baru, published by Rupa Publications India, August 2022)
