There is more room than imagined for reform in the Union Budget for Make in India. Political willingness will provide the answers.
As the 2017-18 Union Budget gets in sight, the question asked very often is: how will the budget redefine the rules of the game, so it is able to achieve its policy objectives? One such — much sought after — rule of the game is for the Make in India initiative. The question, however is, why Make in India is sought after?
With the objective of transforming India into a global design and manufacturing hub, the Government of India launched the Make in India initiative in September 2014. Focusing on twenty five sectors, it lays down a blueprint of how it envisions India as a manufacturing hub. Ever since its launch, the government appears to be making consistent efforts in giving meat to its blueprint. The government has not only provided financial incentives through its Union Budget, but has also engaged in regular sector development through ongoing policy announcements. It has also engaged with stakeholders outside sectoral focus to ensure fruitful developments of the initiative — improving India’s rank in the World Bank’s Ease of Doing Business indicator — or setting up of the Investor Facilitation Cell. Whether such sectoral policies are compliant to international rules defined through India’s membership to multilateral organisations like the WTO; whether developments in improving India’s rank on Ease of Doing Business indicator, is a matter of debate. The question on the success of Make in India’s success still remains up for debate.
The government is quick in suggesting that after the launch of Make in India, there has been an unprecedented increase in FDI inflows in the country.
During the period, October 2014 to September 2016, total FDI equity inflows of USD 77.86 billion was recorded as against USD 48.57 billion received during the preceding twenty four months with an increase of 60 percent (Nirmala Sitharaman’s address in Lok Sabha). Given that there is no counterfactual evidence of whether this would not have been the case — if the Make in India initiative did not exist — reasons behind the success of Make in India remains disputable. Ms. Sitharaman, in her response, states:
“Data regard to the domestic and multinational companies which have invested or have shown interest to invest in the country under the Make in India initiative is not centrally maintained. Export data with specific reference to Make in India initiative is not maintained.”
While the debate on the success or failure of Make in India continues to make headlines, I argue that it suffers from an identity crisis, nullifying the efforts taken by the government to achieve the desired objective. The crisis is only magnified, thanks to an intricate web of international production network, which is increasingly organised within the global value chains (GVCs) — where the different stages of the production process are located across different countries; where goods cross several borders before it reaches to the final consumer; where the rules of international trade are now being redefined from trade in comparative goods to trade in competitive goods.
This leads to the main question: where does it identify India to be in this global value chain?
How does it envision for the goods to be manufactured and traded through this global supply chain? Does it envision India to be that manufacturing hub where companies are encouraged to process intermediates and sell the finished products in the domestic or international market or both, processing and assembling hubs? Or does it envision India to be that manufacturing hub where companies are encouraged to process from scratch, i.e. from raw-materials and sell the finish products in the domestic or international market or both?
Does it want to encourage domestic manufacturing or does it want to encourage foreign manufacturing? For foreign manufacturing, does it want to encourage Greenfield or Brownfield investments?
Does it want to encourage foreign manufacturing through a equity or contractual joint venture between an Indian and a foreign manufacturing or does it want to encourage the establishment of wholly foreign owned manufacturing? Does it want foreign manufacturing to serve the Indian market or the international market, or both?
What does it want to achieve by transforming India into a manufacturing hub? Does it just want to generate jobs or absorb the displacement of jobs or is the vision bolder to include transfer of technology and consequent technological and skill up gradation? Where does it envision SMEs in the global value chain? Does it want to encourage SME participation in the global chain through direct or indirect participation?
To what extent can India relate its initiative to various trade agreements it is signatory to? These questions crossover and cannot be answered in silos.
Identifying the position in the global value chain is crucial in defining both trade and FDI policies of India, which go beyond the existing state of affairs.
To put this in perspective, let’s take the example of India’s FDI policies which has not only seen sectoral limits off the previously defined limits, but also greater encouragement through automatic route, rather than government approval route. The question, however, is: do liberalising FDI sectoral caps encourage its inflow without government approval amount to all the FDI?
I argue that it may be the first step. However, identification of India’s position in the global chain would help determine the various other aspects to FDI policies. For instance, if India wants to be identified as the processing and assembling hub wanting to serve the global market in the aforementioned global value chain, then it can lay greater emphasis on encouraging, in what I refer to as, export-oriented processing FDI, i.e. FDI for processing of intermediates to finished products.
Once the position on the global value chain is identified, concentration can be laid on defining other policies accordingly, which I like to call “supportive policies” to facilitate FDI reforms, in some sense also form a part of the comprehensive FDI reforms. For instance, by investing in building necessary absorptive capacity like investments in skill development or human capital policies, India not only stands in a better position to attract greater levels of FDI, but also stands in a better position to realise the potential of FDI through knowledge absorption, directly and indirectly, via various spillover mechanisms. This would also help in reducing the unemployment shock which the displacement to the manufacturing sector will release.
Identification in the global value chain will also help in defining India’s trade policies by correcting anomalies such as inverted duty structure, correcting trade barriers, and secure a better deal through trade agreements. Besides, with only three countries to ratify the Trade Facilitation Agreement, India has all the more reasons to incorporate a wider range of policies under the umbrella of Make in India.
There is more room than imagined for reform in the Union Budget for the Make in Indiainitiative. It is the political willingness that will provide the answers.
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