Last month, Prime Minister Modi launched his most ambitious project, ?Make in India?. This initiative is the

latest and the most expansive of the attempts that successive governments have made to revive the country?s manufacturing sector over the past decade. In 2006, the National Manufacturing Competitiveness Council (NMCC) had formulated the National Manufacturing Strategy, which underlined the need to increase manufacturing growth to double digits that would enable the share of manufacturing in the country?s GDP to reach 23% by 2015. The UPA II government made further pronouncements for reviving the manufacturing sector through its National Manufacturing Policy in 2011. This time, the target was to increase the share of manufacturing from 16% at the beginning of the current decade to 25% at the end of the decade. Around the same time, the Planning Commission unveiled its National Manufacturing Plan, as a part of the 12th Five Year Plan, that spoke of increasing the share of manufacturing from 16% to 25% by 2025. As against the earlier projections, the Make in India initiative has set its sights to increase the share of manufacturing to 25% by 2022, a task which would require stupendous effort, now that the share of manufacturing has slid to 12% of GDP. According to this new initiative, the increase in manufacturing output will result in the creation of 100 million new jobs.

Although the Make in India initiative has identified a slew of areas which it would cover, there are a few that would need to be prioritised. These are infrastructure, clusters of small and medium enterprises (SMEs), skill formation and innovation. These have been the major choke-points that have seriously affected the performance of the country?s manufacturing sector over the past couple of decades in particular, and would therefore need to be addressed immediately if the declining trend in the share of manufacturing in GDP is to be arrested. While it designs programmes to get these choke-points out of the way, the government must also be prepared to play the role of the prime mover, for these are areas which are typically characterised by ?market failures?.

Creating the infrastructure for the manufacturing sector to take-off would, no doubt, pose the biggest challenge, both in terms of the financial resources that would be required and also the institutional arrangements necessary for ensuring that the identified projects deliver in the shortest possible time. Over the past few years, several estimates have indicated that India?s infrastructural deficit would require in excess of $1 trillion over a five-year period. These estimates imply that India would have to increase its gross fixed capital formation by at least 50% to meet the infrastructure needs. It may be mentioned here that the past estimates may understate the resource requirements of manufacturing sector revival envisaged in the Make in India initiative since this initiative includes development of at least five smart cities and several industrial corridors modelled on the Delhi-Mumbai Industrial Corridor.

The clusters of SMEs have to be the backbone of the manufacturing sector revival for two reasons. First, these are the only enterprises that can provide the impetus for employment generation. Secondly, almost all the sectors that are identified as the thrust areas by the government rely heavily on the SMEs and, therefore, the future of these sectors depends entirely upon the performance of these enterprises. Furthermore, clusters have a long history of successes, beginning with Europe and then in Japan and Korea. But nowhere has this form of organisation seen as much of success as it has in China, where Deng Xiaoping?s policy of promoting SME clusters formed the basis of the emergence of this country as the ?factory of the world?. Typically, these clusters are made up of professional towns and villages that function as production hubs, with one or more towns specialising in the production of one product. This model has seen the development of large-scale specialised production and marketing centres. SME clusters have, thus, enhanced the global competitiveness of the SMEs, generated and spread innovations, and distributed broad-based benefits. It must, however, be pointed out that the state played a major role in enabling the SMEs overcome many of the disadvantages that these enterprises generally face; from raising resources to finding the proper marketing channels to maximise their returns.

Key to the all-round improvement of manufacturing capacities is the infusion of state-of-the-art technologies. Strengthening the technological sinews of the manufacturing sector has at least two immediate imperatives. First, the manufacturing sector needs to improve its competitiveness in order to meaningfully participate in the economic integration processes to which India has committed itself. The economic integration agreements that India had formalised during the past decade have secured very few benefits, owing largely from the inability of the manufacturing sector to improve its presence in the markets of the partner countries. India is currently engaged in an East Asian economic integration process through the Regional Comprehensive Economic Partnership (RCEP), and therefore improving the competitiveness of the manufacturing sector has become extremely urgent.

The second imperative is to meet the challenge of climate change. Although India has decided to meet the challenge of climate change without being subjected to binding international commitments for reducing its carbon footprint, it would nonetheless have to find expedient ways of reducing the emissions of greenhouse gases.

Access to technologies that meet India?s immediate needs has been a formidable barrier. India has insisted in several forums on the importance of technology transfer, but little of substance has happened since the market for technology is tightly controlled by the owners of patented technologies. There seems to be no other option left but to focus on the domestic ingenuities for developing the technologies that the Indian industry needs. For this to happen, the government would have to put an innovation strategy as the centre-piece of the Make in India initiative. This model lies at the heart of the phenomenal success of Japan and Korea, and more recently, China. Interestingly, while laying down the ?Make it in America? strategy for the revival of the manufacturing sector in the United States, President Obama had given a key role to the innovation policy.

Where does the Make in India initiative get its investible funds from? This question has been left unanswered during the unveiling of the initiative, except for the fact that foreign direct investment (FDI) has received critical mention. But it should be fairly obvious that the success of the Make in India initiative would depend on the ability of the government to mobilise resources for funding this ambitious project. Foreign investment can at best complement the efforts that the government makes, a strategy that China followed with unquestioned success. President Obama has underlined his ambition of transforming the United States into a manufacturing hub by investing billions of Federal dollars, besides insisting that the American firms should ?discourage outsourcing, and encourage insourcing?.

Garnering resources should not be an overtly daunting task for a government that is intending to transform the country?s manufacturing sector. There are several important sources that the government can tap into, including improving the tax to GDP ratio, which has mostly remained in single digit, through better compliance and preventing leakages. At the same time, sustained efforts must be made to ensure that outflow of capital can be arrested, which have fuelled tax havens like Mauritius.

These efforts would be better served if India plays an effective role in the efforts being made by the G-20 to address base erosion and profit shifting (BEPS). Since the St. Petersburg Summit in 2013, the G-20 members are engaged in discussions to ensure that international and domestic tax rules do not allow foreign firms to reduce overall taxes by artificially shifting profits to low-tax jurisdictions. Successfully addressing BEPS will not only help the government to resolve tax disputes with foreign firms, but also meet the election commitment of bringing back illegal funds stashed abroad.

Dhar is Professor, Centre for Economic Studies and Planning, JNU and Rao is Professor, Institute for Studies in

Industrial Development, New Delhi