Will ‘Make in India’ succeed?

Will the ideas proposed be enough to attract investments and boost manufacturing output

The government of India is making yet another attempt to boost manufacturing output in the country. In order to attract investments into the sector, Prime Minister Narendra Modi launched the “Make in India" campaign at an event last month in the capital with top industrialists in attendance. Simply put, the idea is that higher investment and activity in the manufacturing sector, on the one hand, will create job opportunities for the ever increasing workforce in the country and, on the other hand, will become the engine of growth for the Indian economy. It will be a win–win situation. The government, according to the Make in India website, intends to increase the growth rate in the sector to 12-14% in the medium term in order to push the share of manufacturing to about 25% of the gross domestic product (GDP) by 2022 from the present level of about 16%.

Interestingly, the idea is not new and attempts have been made in the past without much success and, as a consequence, the share of manufacturing is stuck at about 15% of the GDP for around 30 years. The United Progressive Alliance government in its bid to promote activity in the sector had set up a National Manufacturing Competitiveness Council to suggest ways to enhance competitiveness of the sector, among other things. In a strategy paper of the council, released in 2006, the then Prime Minister Manmohan Singh, in his message, called for increasing the growth rate in manufacturing to 12-14% in the next decade in order to take its share in the range of 25-35% of the GDP. Sounds familiar?

But, as with many other areas of policymaking, outcome in the manufacturing sector also didn’t turnout as Singh would have liked. Since 2005, the manufacturing output, as reflected by the Index of Industrial Production, has gone up by a compounded annual growth rate of about 6% and the last three years have been particularly bad for the sector. The index, in absolute terms, in July 2014 was roughly at the same level registered in June 2011, reflecting a virtual stagnation in the sector. So, will the Make in India campaign finally alter the fortunes of the manufacturing sector?

There is no doubt that the Modi government is making the right moves ever since it took office in May. Efforts are being made to reduce bottlenecks and put clearances on fast track. “We will create world-class infrastructure that India badly needs to accelerate growth and meet people’s basic needs. We will make our cities and towns habitable, sustainable and smart; and we will make our villages the new engines of economic transformation. ‘Make in India’ is our commitment—and an invitation to all—to turn India into a new global manufacturing hub. We will do what it takes to make it a reality," Modi noted in a column in The Wall Street Journal. (See: An Invitation to ‘Make in India’, 25 September). But again, will the ideas proposed be enough to attract investments and boost manufacturing output?

The rise of Asian countries as manufacturing hubs in the post-war period, particularly Japan and China, had at least one thing in common—undervalued currency. Because of the damage inflicted by the World War II, the Japanese economy was in shambles. Output collapsed and prices were rising uncontrollably (yes, prices can rise in Japan as well). In order to bring the economy back on track, among other things, the exchange rate was fixed at 360 yen to the US dollar in 1949 and it remained so for the next 22 years. “…rate of 360 yen to one dollar was probably an undervaluation. It certainly allowed Japan to embark on an export-led growth strategy," noted Kwasi Kwarteng, a historian and a member of the British Parliament, in his recent book War and Gold: A Five-hundred-year History of Empires, Adventures and Debt (2014). The yen was valued at par with the US dollar when it was first adopted in 1871. Undervaluation of the yen was a significant factor in the rise of Japan as a manufacturing powerhouse. The advantage was lost in 1985 because of the Plaza Accord, and the economy has been struggling ever since.

Similarly, also highlighted by Kwarteng in his book, between 1980 and 1992, the Chinese currency was devalued by a magnitude of 74%, 85% and 60% against the US dollar, Japanese yen and Hong Kong dollar, respectively. The undervaluation of the Chinese yuan paved the way for export-led growth with manufacturing being the key driver. This resulted in a massive trade surplus in the favour of China and, over the decades, also led to resentment among its trading partners, especially the US. In fact, Mitt Romney, the Republican candidate who lost to Barack Obama in the 2012 US presidential elections, had announced that he will declare China as a currency manipulator on his first day in office.

It is highly unlikely that India at this stage will get a similar currency advantage, which was an important factor behind the rise of Japan, China and other Asian economies. However, it will help if the Reserve Bank of India does not allow the rupee to appreciate solely on the back of capital flows, as has been the case in the past, and makes sure that it adjusts to the difference in inflation with trading partners. India at this point may not like to rig the foreign exchange market to promote export-led manufacturing but it can surely keep a check on the currency becoming a disadvantage at any stage for Indian producers. This is not to suggest that output cannot expand in the sector without the support of a weaker currency, but to underline the fact that it is likely take a lot more time, effort and “creative thinking" than commonly perceived.