The new government?s Make in India initiative shows a promise that has been missing from policies that have characterised over two decades of economic reform. Past reforms have mostly consisted of liberalisation, and have tended to be piecemeal and tentative?the so called ?reform by stealth,? or gradualist approach. This time could be different. However, a series of challenges remain.
The most significant challenge remains the nature of the Indian State. India?s top policymakers may still not have a fundamental sense of what it means to make things for profit. The long-standing suspicion of business and profit-making is compounded by the piecemeal reforms, which have often strengthened opportunities for crony capitalism and rent-seeking. There is no easy solution to this challenge, since actually making Make in India successful requires government action across a coordinated set of issues, including physical infrastructure, education and skilling, the legal environment, and business finance. Attempts at coordination can degenerate into paternalism and lack of prioritisation, and end up failing.
A second challenge is the global economy. Just when India began to reform, concerns began to grow about ?deindustrialisation.? At first, this was only discussed in the context of countries that had already industrialised, and were therefore already at high levels of GDP per capita. Then, more recently, economists such as Dani Rodrik pointed out that the share of manufacturing was falling in countries that were far short of rich-world levels of income. This was ?premature deindustrialisation.? More recently still, Arvind Subramanian, now India?s chief economic adviser, and co-author Amrit Amirapu observed the same phenomenon within India, and even for India?s poorer states. If the global economy is suffering from deindustrialisation, how can India avoid this trend? A related aspect of globalisation is the fragmentation of production chains across national borders, making it harder to develop complete sets of skills, as Japan did by learning how to manufacture world-class automobiles.
The third challenge is technological change. There are suggestions that the digital revolution is destroying jobs, and that they will not return. Automation is becoming cheaper, and reducing the need for factory jobs which have been part of a virtuous circle of industrialisation in the past, providing opportunities for skill development and income beyond subsistence.
For Make in India to succeed, all three challenges will need to be addressed simultaneously. In particular, the coordinated set of reforms to make Make in India successful has to be cognisant of the challenges posed by globalisation and technological change. Some of the debate about how to respond to deindustrialisation has focused on how many services are now based on modern technology and can be traded across borders. Dani Rodrik has argued that the potential of services is limited as a stepping stone to development, because most services will remain non-tradable, while others require skills greater than those needed for an entry point to development.
The issues of how to achieve scale and low enough entry costs for labour in any new approach to development, whether by making industrial goods or by providing services, is indeed the central one for government policymakers. Any successful set of policies to support industrialisation, through any combination of manufacturing and services, has to not just make it easier to do business with coordinated reforms, but also to provide strategic support based on a vision of where the global economy is heading. In 1950, Japanese policymakers saw automobiles as a manufactured product that could be the basis for expertise in making a wide range of engineering goods, all of which would be increasingly sought by consumers in rich countries. Now, those consumers seek products that will help them maintain or improve their health. Furthermore, they increasingly spend on leisure and entertainment activities, many of them digitally based. Finally, these consumers are becoming concerned about environmental sustainability. Demography and income matter, and they can be the basis for predicting where demands for new products will arise, shaping what India might profitably make, and training the workers that will be needed.
There is another aspect of India that deserves some consideration when shaping the Make in India vision. The country?s population is already greater than the global population in 1800. The point of this observation is that there is plenty of room for realizing economies of scale from serving the domestic market. Similarly, globalised production chains that have evolved to take advantage of scale can have domestic analogues in a country the size of India. The Delhi-Mumbai Industrial Corridor, and four others being conceptualised, can be the basis for creating such domestic analogues. The critical shortages of technological know-how and access to finance will have to be overcome, and these will require tapping global resources.
Ultimately, of course, governments can only do so much. They cannot pick guaranteed winners, and they cannot make sure that every business idea succeeds. But a forward-looking Make in India policy that recognises where global and domestic opportunities lie for future growth has the best chance of succeeding, and overcoming the prevailing pessimism of the pundits.
The author is Professor of Economics, University of California, Santa Cruz