An Economic Analysis of the ‘Make in India’ Program

The ‘Make in India’ program webpage states as its objectives the following: (1) to facilitate investment, (2) to foster innovation, (3) to enhance skill development, (4) to protect intellectual property, and (5) to build manufacturing infrastructure. This short blog post focuses of selected aspects of the program as laid out of the webpage and then critically examines them and the economics underlying them.

Selected features of the program from the webpage are outlined in this paragraph.  The process of industrial licensing has become simpler and for some, the validity has been extended. There is an impetus to develop industrial corridors and smart cities. The cap of foreign direct investment (FDI) in defence raised from 26% to 49%, with further easing of FDI norms underway in the construction sector. Labour-intensive sectors such as textiles and garments, leather and footwear, gems and jewellery and food processing industries, capital goods industries and small & medium enterprises will be supported. Further, National Investment & Manufacturing Zones (NIMZ) will be set up. Incentives for the production of equipment/machines/devices for controlling pollution, reducing energy consumption and water conservation will be provided.

To summarize, the government will provide incentives for the construction of green technology while at the same time making it easier for firms to get environmental (land) clearances. Setting up industrial zones is a good idea because it reduces transportation costs and common infrastructure can be better streamlined; also, they should be located at a safe distance from populated areas. Investment by foreign companies is beneficial if they these investments entail the learning of new technology and scientific and managerial collaboration. FDI should not be forthcoming solely to exploit the low wages prevailing in India.

Undoubtedly, India needs to revive its manufacturing sector. Globally, Indian manufacturing products need to be competitive. To achieve these two objectives, the present government’s ‘Make in India’ program is necessary. As always, we need to wait and see how the program works in practice. This program is aimed at improving the supply-side of the economy – improving the capacity to supply manufactured products. Creating of physical infrastructure will also have multiplier effects on agricultural and services sector.

Two related issues need to be raised in this context. Firstly, what about economic ‘reforms’ targeted at the demand-side of the economy? Secondly, isn’t it more prudent to validate the supply of manufactured commodities from domestic demand than foreign demand? Let us take each of them in some more detail. Raghuram Rajan made the second point in his December 12, 2014 Bharat Ram Memorial Lecture. Ashok Desai, in the Outlook, criticises the previous government for their corruption scandals and economic schemes which, according to Desai, primarily benefited the non-poor and due to their consumption raised the industry and services growth rates.

While supply-side measures are important, we must not lose sight of demand-side measures – such as public investment in health and education. The recent cut in public health expenditure by the current government is indeed very alarming. Equally important is a good labour law framework which ensures good working conditions for workers and a decent minimum wage. This will ensure adequate domestic demand, as our workers will earn above-subsistence incomes and be healthy. If the core institutions of health and education (and clean environment) are also strengthened alongside the labour market ones, then domestic demand-led growth will not be difficult to manage.

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