Indian economy’s revival in the third quarter, with a GDP growth rate of 7.2%, has again made it the fastest-growing major economy, leaving China behind.
Indian economy’s revival in the third quarter, with a GDP growth rate of 7.2%, has again made it the fastest-growing major economy, leaving China behind. On the back of rising incomes, Indian imports (non-oil) have seen a commensurate rise, increasing from $318.04 billion in 2015-16 to $350.56 billion in 2017-18—a 10.2% rise. Sectors such as leather, textiles and pharmaceuticals, which have been the mainstay of India’s exports in the past, are not only losing their competitiveness, but also face rising imports. This comes at a time when the government’s focus is on Make-in-India, which, apart from promoting exports, also aims at making India a major manufacturing giant.
While the scheme aims at attracting foreign investors, it also tries to cut down on (non-essential) imports, thereby encouraging greater domestic production to serve the Indian citizenry. Radical changes and simplifications made to India’s FDI policy since Make-in-India have made it one of the most open economies of the world. FDI limits have been liberalised in sectors such as defence, civil aviation, pharmaceuticals and e-commerce activities. As a result, FDI inflows in the manufacturing sector went from $16.5 billion in 2014-15 to $20.3 billion in 2016-17, a growth rate of 23% in two years. However, with respect to boosting domestic production, Make-in-India is yet to show a significant impact.
To reduce India’s dependence on imports and push domestic production, it is important to fix “the nuts and bolts” of the economy, as also pointed out by Kaushik Basu in his book ‘An Economist’s Miscellany’.
Reforming the rigid and multiple labour laws should be the first step. There are 44 central and 160 state laws for labour. In addition, extensive approvals are required before hiring and firing of workers. These laws force MSMEs, which contribute to 40% of India’s exports, to remain small, which, in turn, doesn’t allow them to take advantage of economies of scale. While 30% of formal enterprises in India employ only 10-19 employees, the vast majority (91.3%) of firms in the informal sector only have 0-4 employees. Recently, Basu pointed out that a major reason for the success of Bangladesh’s garment manufacturing industry is that the main garment firms are large, as compared to those in India. A larger firm size leads to benefits of division of labour, ease in accessing formal credit markets, labour welfare, higher wages and economies of scale, among other benefits. There is, thus, a need to build a common labour code that motivates firms to grow in size and scale, rather than restricting them, and also rationalises all the existing laws under one code, in a similar way as GST. States such as Rajasthan and Maharashtra have reduced the regulatory burden by changing labour laws. Maharashtra has allowed factories employing fewer than 50 contract workers to function without registering themselves with the concerned authorities. The threshold earlier was 20. It remains to be seen whether such liberalisation will impact manufacturing.
Second, calculations show that there is a positive correlation of 37.5% between DIPP rankings and manufacturing growth rate rankings of states. These rankings are assigned on the basis of implementation of reforms in areas such as single-window system, construction permits, labour registrations, enforcing contracts, etc. It leads to a healthy competition amongst states, which, in turn, improves their business climate. We further find that the future manufacturing growth rates of states that come in the top-five DIPP rankings increase by nearly 3% in comparison with other states. This suggests that state governments would be better off if they follow the guidelines provided by DIPP and implement the necessary reforms to make doing business easy in their respective states.
Third and last, India has a cumbersome process of land acquisition that drives up the costs of production significantly for an entrepreneur. It is time to set up a land bank corporation that can conduct a detailed audit of government land available to begin with. Data shows that the quantum of land with Indian Railways not under any operational use is around 1.14 lakh acres. Similarly, 2.35 lakh acres of non-productive land lies with public sector undertakings (PSUs). Also, the ministry of defence and the Airports Authority of India (AAI) have vast tracts of unused land lying in some of the most populous states. Odisha, for example, has tried to address this issue by reserving more than 59,718 acres of land under the land bank project. This land bank was created only after the state lost major investments from big-ticket players such as ArcelorMittal and POSCO, who encountered serious problems in land acquisition. Under this, the state will acquire unused government land instead of going in for land acquisition, which is a complicated process. This land will attract investments from sectors such as steel, aluminium, IT, apparel, etc, which have great employment-creation potential. Subsequently, state governments can also draft a policy for the utilisation and financialisation of land. Doing this will open new means for industry to acquire land and that too at a cheaper rate than what is currently available.
If the above-mentioned changes and reforms are incrementally incorporated in the currently functioning version of Make-in-India by the central and respective state governments, the investors will have greater incentives to produce in these states, improving their manufacturing base. At an all-India level, this will lead to a bigger domestic manufacturing base, aiding the success of Make-in-India.
Aakanksha Shrawan, research assistant, Pahle India Foundation