Making ‘Make in India’ happen

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. A
close dialogue and partnership
between government and the private
sector is critical
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.
Also read: Come, Make In India
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.
Read: Soft power, hard choices
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.
Read: Hurdles to ‘Make in India’
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.
(Ravi Venkatesan is the former
Chairman of Microsoft India and
Cummins India and an author of
Conquering the Chaos: Win In India,
Win Everywhere.)