Column: Make In India – An odd signal

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Published: February 24, 2016 12:17:45 AM

The initiative’s emphasis on foreign trade is considerably lower than on foreign investment for the domestic market

Make-in-India conveys an odd signal on India’s current approach to economic globalisation. This is evident from the difference in its emphasis between foreign investment and foreign trade, the two key aspects of globalisation.

The emphasis on foreign investment is loud and clear. None other than the prime minister himself has taken Make-in-India to foreign shores and potential investors. Investor attention in India has picked up as have long-term FDI inflows. RBI’s monthly statistics on FDI flows—at around $32 billion in FY15 and more than $30 billion in the first nine months (April-December) of FY16—reflects these. Some might argue that the flows would have materialised even without Make-in-India given the government’s efforts to improve doing business conditions and India having the brightest growth prospect among emerging markets. Nonetheless, Make-in-India appears to have at least partially influenced investments by its focus on making India a manufacturing hub and creating enabling conditions for becoming so.

The target consumers for Make-in-India have been a point of speculation. This has a bearing on the nature of FDI “pulled” by the programme. Till now, the new foreign investment inflows are largely dedicated to producing for the domestic market. Domestic-market oriented FDI has traditionally been the investment that India has drawn. Given that exporters suffer from major competitive disadvantages in India, mainly on logistics and infrastructure facilities, compared with countries in Southeast and East Asia, export-oriented FDI has been much less. The situation hasn’t changed much with Make-in-India. But if the aim is to transform India into a global manufacturing hub, then it must have a global focus. And if such a focus is indeed there, then foreign trade must be emphasised as much as foreign investment by Make-in-India.

The odd signal conveyed is from the emphasis on trade being much less compared with investment. Indeed, this is where the conceptual ambiguity about the objective of the initiative looms large. If Make-in-India is to enable producers based in India to make for the world and capture global markets, then it must posit itself firmly in India’s foreign trade policy. But without a clear articulation of how Indian producers can penetrate deeper into global markets, long-term investors, looking at India as a location for producing for the rest of the world are unlikely to be enticed.

The danger that Make-in-India faces is to reduce itself into a programme for import-substitution through foreign investment. This might sell well for constituencies keen on displacing cheap imports. But there are problems in sustaining the strategy both from supply and demand sides. India is no longer among the cheapest locations for manufacturing. Higher production costs, particularly for trained labour, might affect profit margins of producers, especially those aiming to displace cheap imports, such as smartphones. Global assemblers of smartphones and electronic products, such as Foxconn, for example, might find even high volumes of domestic sales not producing enough revenue for covering production costs. They would look forward to third-country markets for greater earnings and would be disappointed by the absence of enabling policies. On the demand side, a home-focused strategy will run into trouble if private consumption peters out once inflation resurfaces cutting real incomes and consumer surpluses. Domestic market-oriented FDI is premised on the assumption of a deep domestic market, which might flounder following cyclical downturns in household incomes.

The long-term success of Make-in-India depends on its ability to attract FDI that will focus on manufacturing for both Indian and overseas consumers. Attracting export-oriented FDI will depend on two necessary conditions. The Modi government is already working on the first: improving business conditions for exporting from the country. But till now, it has not done much on the second condition: proposing an enabling and constructive foreign trade policy.

Without a well-thought out and progressive trade policy, one that encourages getting deeper access in foreign markets and allows exporters to import raw materials and intermediates easily for making final products, export-oriented FDI won’t flow.

It is important to realise that investments generate exports. Decisions on locating investments are taken by investors after careful study of the suitability of various locations for exports. Exports include not only final products, but also semi-finished and unfinished inputs that contribute variously to global value chains. In a world where global assemblers and retailers control cross-country production networks and take the final call on investment location decisions, trade policies of countries become fundamental determinants for attracting investments. Investment flows would be restricted if countries project themselves as attractive locations primarily on the size of their domestic markets. It is true that size matters. But in the modern world of manufacturing, what matters more is a global vision of the host country accompanied by appropriate action on implementing the vision. An ambiguous trade policy can undo some of the long-term benefits of the good work being done by India on domestic competitiveness and can confine Make-in-India at home rather than taking it to the world.

The author is senior research fellow and research lead (trade and economic policy) in the Institute of South
Asian Studies, the National

University of Singapore.

E-mail: Views are personal

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