Has the Make in India program been successful in altering the constituents of the Indian economy?

Every economy comprises 3 constituents namely the agriculture, industry, and services sector. Make in India campaign was launched in 2014 with the target of boosting India's manufacturing sector that in turn would have altered the constituents of the Indian economy. However, as things stand today, there has not been a visible shift in trends for the constituents of the Indian economy. The trends for 3 constituents namely agriculture, industry & manufacturing, and services have remained the same even after the launch of the Make in India project.

In 2017, the Agriculture sector contributed 15.4% to India's GDP, the industry & manufacturing contributed 23% (approximately 16% comes from manufacturing and the remaining 7% from other industries), whereas the services contributed 61.5% to India's GDP.

While the percentage of the agriculture & allied sector has fallen gradually, and the percentage of the services sector has gone up gradually, however, the percentage of the industry & manufacturing sector has remained the same for the past many years in India.

In fact, from the period 2000-01 to 2013-14, the trend has been like this.

The contribution of the agriculture & allied sector to India's GDP has been gradually falling since 2000-01. The agriculture & allied sector contributed 22.36% to India's GDP in 2000-01. And by 2013-14, the contribution of the agriculture & allied sector had come down to 13.94% of India's GDP.

The contribution of the services sector to India's GDP has been gradually going up since 2000-01. The services sector contributed 50.49% to India's GDP in 2000-01. And by 2013-14, the contribution of the services sector had gone up to 59.93% of India's GDP.

The contribution of the industry including the manufacturing sector to India's GDP has been almost constant since 2000-01. The industry including the manufacturing sector contributed 27.25% to India's GDP in 2000-01. And by 2013-14, the contribution of the industry including the manufacturing sector was 26.13% of India's GDP.

The contribution of the manufacturing sector alone to India's GDP has also been almost constant since 2000-01 despite the launch of Make in India policy. The manufacturing sector alone contributed 15.46% to India's GDP in 2000-01. And by 2013-14, the contribution of the manufacturing sector alone was 14.94% of India's GDP.

These trends continue until now in the fiscal year 2019-20.

In comparison, in the case of China, In 2017, the Agriculture sector contributed 8.3% to China's GDP, the industry & manufacturing contributed 39.5% to China's GDP, whereas the services contributed 52.2% to China's GDP.

In the case of the advanced economies, the services sector contributes upward of 75% to the GDP. However, it should be noted here that all these advanced economies are high-income countries and therefore Indian economy can't be compared with these economies at this stage of India's development.

Even in the case of South Korea, in 2017, the Agriculture sector contributed 2.2% to South Korea's GDP, the industry & manufacturing contributed 39.3% to South Korea's GDP, whereas the services contributed 58.3% to South Korea's GDP.

Therefore, it is clear that for India to grow economically and generate millions of jobs, the contribution of the industry & manufacturing sector has to grow from the current 23% of the GDP to about 35% of the GDP. The contribution of the Manufacturing sector alone would have to grow from the current 16% of the GDP to 25% of the GDP.

However, it's been 6 years since the launch of the Make in India project and yet things have not improved. The industry & manufacturing sector continues to move linearly with the overall economic expansion.

The time has come to involve manufacturing entrepreneurs in the formal policy-making roles in order to draft comprehensive manufacturing policies for the country. Without a robust manufacturing policy and the supporting technical infrastructure, the industry & manufacturing sector can not grow fast. Bureaucrats and economists don't possess the subject knowledge and therefore asking them to draft manufacturing policies for the country is actually asking them a lot. Let's hope, manufacturing entrepreneurs are brought in policymaking roles to revive India's industry & manufacturing sector.

The Information Technology sector has been a success story in India, why can't the manufacturing sector be?

The services sector contributes nearly 61.5% to India’s GDP. The services sector has become the mainstay of the Indian economy. Despite the launch of the Make in India initiative in 2014, the manufacturing & industry sector contributes only 23% to India’s GDP. Whereas the agriculture sector contributes 15.4% to India’s GDP. As can be seen from the graph below, the share of the services sector is higher for the high-income countries barring China. In the case of China, the manufacturing & industry sector contributes nearly 40% to the Chinese GDP. However, India’s services sector has grown despite the lack of growth in the manufacturing & industry and agriculture sectors.

The IT/ITeS segments generate a bulk of the revenues for the overall services sector in India. As per the NASSCOM report, India’s information and technology sector recorded a growth of 7.7% with revenues of 191 billion US$ in the Fiscal year 2020. The sector also added 205000 new jobs in the fiscal year 2020. The sector has the potential to reach 350 billion US$ in revenues by 2025. By the year 2016, the sector had generated 3.7 million direct jobs and 10 million indirect jobs. The sector is poised to generate a total of 7 million direct jobs and 20 million indirect jobs by the year 2025. These are all impressive numbers.

Besides the IT/ITeS segment, healthcare and tourism add substantially to the overall services sector in India. And then, space, transportation, logistics, and other services form the core of the overall services sector in India.

• Why has the services sector grown and the manufacturing sector has lagged behind in India?

One reason could be entrepreneurship in India. The Indian entrepreneurs have built the entire services sector on their own with very minimal support from the state. In other words, the services sector required very minimal state support and therefore the sector has grown in India. However, wherever state support is necessary, those sectors have not done well in India. For example, manufacturing & industry definitely require state support and as can be seen from the above graph, the manufacturing & industry sector has not done well for a low-income country like India. Manufacturing contributes 16% to India's GDP out of the total of 23% contribution of the combined manufacturing & industry sector. The Indian policymakers have been looking to increase the share of the manufacturing sector from the current 16% to 25% to India’s GDP. And yet, the manufacturing sector has not grown. Make in India program was launched in 2014 with this sole objective, and yet, results are nowhere to be seen.

A low-income country like India can not move to the middle-income level unless and until the manufacturing & industry sector grows. India may not be able to replicate China’s numbers, however, it goes without saying that the manufacturing & industry sector needs to grow in India not only to boost India's economic growth but also to generate millions of jobs that India needs badly.

The Indian entrepreneurs have developed the services sector on their own. It’s time Indian entrepreneurs are encouraged to grow the manufacturing & industry sector as well. Since the manufacturing & industry sector requires state support in terms of developing the technical infrastructure in the country, therefore, Indian entrepreneurs shall not only be encouraged to grow the manufacturing & industry sector but also be encouraged to frame policies for the Make in India project. 

It is now certain that bureaucrats and economists can’t understand the technicalities of a hard subject such as manufacturing & industry. Therefore, it is beyond the scope of the bureaucrats and economists to frame policies for the manufacturing & industry sector. The need of the hour is to involve entrepreneurs in the policymaking roles when it comes to the Make in India initiative. Without involving entrepreneurs in the formal policymaking roles, it would be difficult to frame good policies and develop the necessary technical infrastructure for the manufacturing & industry sector.

The data pertaining to the services sector highlight that whenever the sector was left to its entrepreneurs, that sector grew tremendously. The IT/ITeS sector further strengthens this argument. The manufacturing & industry sector can become a growth sector for the Indian economy in the coming years provided entrepreneurs are making the policies for this sector. Will this happen?

What is the current state of the manufacturing sector in India and how does the Indian manufacturing sector compare with the rest of the world?

As per the world bank data, the world manufacturing output, value-added (in current US$) stood at 14.17 trillion US$ in 2018. And India's manufacturing output, value-added (in current US$) stood at 403.05 billion US$. In other words, India's manufacturing output, value-added (in current US$) was 2.84% of the world's manufacturing output, value-added (in current US$).

China, which has come to be known as the world's factory contributed nearly 28.25% to the world's manufacturing output, value-added (in current US$). Overall, Chinese manufacturing output, value-added (in current US$) stood at nearly 4.003 trillion US$ in the year 2018. The Chinese nominal GDP in 2018 was 13.608 Trillion US$ (Current US$). Therefore, manufacturing contributed nearly 29.42% to the Chinese economy. Chinese exports were 19.51% of the Chinese GDP. Or in other words, China exported approximately 2.655 trillion US$ worth of Goods.

Here is a chart showing the top 10 countries by share of world manufacturing output in 2018:

As can be seen from the above chart, the Chinese manufacturing output was nearly 10 times the Indian manufacturing output in 2018.

With nearly the identical population size, China has clearly taken a massive lead over India when it comes to the manufacturing sector.

And since 2014, India's manufacturing output has slowed down considerably. While from 2004 to 2014, India's manufacturing output grew at a CAGR of 10.59%. And since 2014 when the Make in India program was launched, the manufacturing output grew at a CAGR of 7.02%.

During the same period, the Chinese manufacturing output grew at a CAGR of 17.68% from 2004 to 2014. And since 2014, the Chinese manufacturing output grew at a CAGR of 5.89%.

The Chinese manufacturing output has slowed down from the period of 2004 - 2014 to 2014 - 2018 because of rising wages in China. It is clearly understandable.

However, what explains the slowing down of India's manufacturing output from the period of 2004-2014 to 2014-2018? While Chinese manufacturing is slowing down due to rising wages in China, other emerging countries like Bangladesh, Vietnam, etc. have grabbed the opportunity to boost their manufacturing output. And India has lagged behind because of a lack of preparedness.

The government of India launched the Make in India program in 2014. However, the program just focused on top-down manufacturing approach. The automotive industry nearly contributes about 50% to India's domestic manufacturing output. However, automotive manufacturing is a top-down manufacturing approach. A large automotive company sets up a plant in India after assessing the demand and the size of the Indian market. Thereafter ancillary component manufacturing companies come up to supply different components to the automotive company. This approach is known as top-down manufacturing approach. Robots and high-tech machinery are used in this kind of manufacturing to produce final products. Therefore, employment generation is not high in this kind of manufacturing approach.

The Make in India program failed to focus on the bottom-up manufacturing approach. And no wonder, India's manufacturing output growth has slowed down since 2014. Simple common household goods are not manufactured in India. Instead, these goods are sourced from China. Indian entrepreneurs are becoming traders and not manufacturers. Simple common household goods such as Diwali Lights, Toys, Electrical items, electronic items, etc. that are consumed on a daily basis are not manufactured in India. No big company will make these products. Only a startup entrepreneur can manufacture these goods. However, there is no policy framework or manufacturing infrastructure to support this kind of bottom-up manufacturing in India. And no wonder, Indian entrepreneurs do not manufacture these simple common household goods in India.

It is high time the Make in India Program focuses on bottom-up manufacturing to boost manufacturing output in India. Given the population size in India, the Indian manufacturing output shall be close to 2 trillion US$ and not 400 billion US$. The focus on bottom-up manufacturing will not only generate employment on a large scale but also boost India's consumption and exports thereby giving a fillip to India's sagging economy.

Macro and Micro level solutions for India to achieve double-digit economic growth for the next 2 decades

Macro

The Indian economy has slowed down. And it has been slowing down for the last several quarters now.

India GDP Growth rate last 10 years:

Data Source: Ministry of Statistics & Programme Implementation

As can be seen from the above chart that the quarterly GDP growth rate is consistently falling since Jan - Mar 2018 quarter. In other words, the quarterly GDP growth rate numbers are falling for the last 7 quarters. This consistent fall in GDP growth rate for the last 7 quarters has raised the concern that problems in the Indian economy are structural and not cyclical.

• Therefore, what are these structural problems in the Indian Economy?

As we all know, the GDP comprises of 4 major components:
Economy E = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X=Exports-Imports)
Here is the data for each of the 4 components of the Indian economy:

Exports as a percentage of GDP of India:

Imports as a percentage of GDP of India:

As can be seen from the above charts that the Consumption and Investment comprise roughly 90% of India's GDP. And Consumption is plateauing. Whereas Investment rates are falling consistently.

Therefore, at a macro level, the problems are identified. The problems are plateauing consumption and falling investment rates.

• Now, the question is, how can this trend of plateauing consumption, as well as falling investment rates, be reversed? 

One suggested solution is to give money in the hands of the people, especially rural people, in the form of PM Kisan, MNREGA, etc. The rural people with money in hand spend spontaneously thereby raising the consumption. However, is this solution really sustainable?

The other suggested solution is employment generation. This is a good idea as this will not only give a boost to consumption but also raise investment rates. Construction, infrastructure, manufacturing are 3 sectors that can certainly generate employment at a large scale.

• The construction sector though is going through a bad phase with many stuck and delayed projects. The union government has recently announced a stress fund to revive the construction sector. This is a step in the right direction. 
• The infrastructure sector is plagued with land acquisition issues. Within the infrastructure sector, roads, highways, railways have been given a special focus. The union government recently announced that 100 Lacs Crores worth of Infrastructure projects will be started in the next 5 years. However, both these sectors namely construction and infrastructure will take time to fructify. 
• The third sector that can generate employment at a large scale in India is the manufacturing sector. However, years after years, the manufacturing sector has not boomed in India.

Micro

The manufacturing sector has the potential to transform the Indian economy. Focus on the manufacturing sector and in particular on the Make in India initiative can set India on a path to achieve double-digit growth for the next 2 decades.

However, to boost the manufacturing sector in India, we need to differentiate between top-down manufacturing and bottom-up manufacturing.

Since 2014, the FDI inflows in India in absolute number terms have increased. However, FDI inflows as a percentage of GDP are below 2%. 

Moreover, FDI inflows go into various sectors of the economy. And even within the manufacturing sector, the FDI inflows go into the top-down manufacturing. 

In a top-down manufacturing approach, automation has resulted in a lack of employment generation. Robots and high-tech machinery are deployed to produce goods. 

Therefore, the bulk of the employment generation is only possible in bottom-up manufacturing. However, even the Make in  India program failed to focus on bottom-up manufacturing. And this is where our policymakers lack attention to details. Focus on bottom-up manufacturing will not only generate millions of jobs but also reduce India's trade deficit with China. Focus on bottom-up manufacturing will facilitate Indian entrepreneurs to manufacture simple common household goods in India rather than trading these goods from China. Simple common household goods such as toys, electrical items, electronic items, Diwali Lights, Plastic products can be easily manufactured in India. However, Indian entrepreneurs trade these goods from China. To support bottom-up manufacturing, the policymakers need to focus on developing manufacturing infrastructure in India. And this manufacturing infrastructure can be easily developed in a span of 2-3 years. All it needs is attention to detail. Now, the question that arises is 'How can this manufacturing infrastructure be developed'? Part of Government Spending (G) must be geared towards developing the manufacturing infrastructure. Once bottom-up manufacturing kicks-up in India, the private investment in the bottom-up manufacturing will rise regularly. However, the government needs to provide a trigger point.

Once this manufacturing infrastructure is in place, the Indian entrepreneurs will manufacture globally competitive common household goods in India. New manufacturing jobs will be created. This will not only boost India's own consumption but also give a boost to exports while reducing the imports from China.

Net-net, the Indian economy can boom by focusing on bottom-up manufacturing.

India China Economic Comparison

India and China were at the same per capita income in 1980. However, as things stand today in 2020, the Chinese economy has taken off whereas the Indian economy has lots of catching up to do.

As per the world bank data, In terms of nominal GDP in 2018, the Chinese economy in current US$ (13.608 Trillion US$) was 5 times the size of the Indian economy (2.719 Trillion US$).

As per the world bank data, In terms of PPP GDP in 2018, the Chinese economy (25.399 Trillion US$) was 2.42 times the size of the Indian economy (10.5 Trillion US$).

The gap between the Chinese economy and the Indian economy is massive. And it will take India several years to catch up with China.

However, how did this huge gap develop between the Chinese economy and the Indian economy? To understand this, we will rely on the numbers rather than rhetoric.

And here are the numbers:

Firstly, Economy comprises of 4 major components:

Economy (E) = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X=Exports-Imports)

Therefore, let's get the data for each and every component of the economy for both India and China.

• Consumption (C):

As can be seen from the above charts, the Consumption as a percentage of GDP in 2018 for China was 38.68%. Whereas, the Consumption as a percentage of GDP in 2018 for India was 59.39%.

Another point to be noted is that in the case of the Indian economy, the Consumption as a percentage of GDP has always been higher than the consumption as a percentage of GDP for the Chinese economy.

• Investment (I):

As can be seen from the above charts, the Investment as a percentage of GDP in 2018 for India was 31.31%. Whereas, the Investment as a percentage of GDP in 2018 for China was 44.06%.

One can also observe that for the Chinese economy, the Investment as a percentage of GDP has always been higher than the investment as a percentage of GDP for India. There is almost a difference of 12-15% as a percentage of GDP between the Chinese economy and the Indian economy.

• Government Spending (G):

As can be seen from the above charts, government spending as a percentage of GDP for China in 2018 was 14.68%. Whereas, the government spending as a percentage of GDP for India in 2018 was 11.23%.

One can also observe from the above charts that government spending as a percentage of GDP for the Chinese economy has always been higher than that of the Indian economy.

• Net Exports (X):

We will analyze exports and imports for both the Chinese and Indian economies.

Exports:

As can be seen from the above charts, exports as a percentage of GDP for India in 2018 were 19.74%. Whereas, the exports as a percentage of GDP for China in 2018 were 19.51%.

However, it is also evident that with rising wages in China, Chinese exports are falling consistently since the peak of 2006.

Therein lies the opportunity for India to focus on its manufacturing sector especially on bottom-up manufacturing to expand its exports worldwide.

Imports:

As can be seen from the above charts, imports as a percentage of GDP for China in 2018 were 18.73%. Whereas, imports as a percentage of GDP for India in 2018 were 23.64%.

• Calculations:

Having gathered all the data, we can do simple calculations for both the Chinese and Indian economies.

E = C + I + G + X

For China in 2018:
E = 38.68 + 44.06 + 14.68 + (19.51 - 18.73)

For India in 2018:
E = 59.39 + 31.31 + 11.23 + (19.74 - 23.64)

• Conclusion:

As can be seen from the above charts and calculations, the Chinese economy grew on account of higher Investment (I) and Government spending (G). The consumption as a percentage of GDP has always been lower for the Chinese economy than that of the Indian economy.

Therefore, it is no rocket science to understand from the above charts that for India to grow at 8 - 10% for the next 2 decades, the Indian policymakers need to make sure that both Investment (I) and Government spending (G) rise. The investment (I), as well as Government spending (G), must be geared towards supporting the manufacturing sector or Make in India program.

Focus on the manufacturing sector, especially on bottom-up manufacturing, is the need of the hour to achieve double-digit economic growth as well as to generate millions of jobs. When Investment (I) and Government spending (G) go into the manufacturing sector in India, then, it is highly likely that India's exports will also boom, thereby, giving a further boost to India's GDP.

Coronavirus and other global factors should ideally have become an opportunity for India instead of a threat

These days in business circles or on online forums as well as on social media platforms, the talk is 'What will be the effect of the coronavirus on the already slowing Indian economy'? or 'Global factors are weak and therefore these factors are pulling Indian economy down' or 'World is entering into a recessionary phase'.

Some people term the above-mentioned reasons as valid reasons while others merely scoff at these reasons claiming that India's economic problems are more internal in nature than external.

Instead, Coronavirus and other global factors should ideally have become an opportunity for India instead of a threat.

Let's assess it analytically.

Economy comprises of 4 major components:

Economy (E) = Consumption (C) + Investment (I) + Government Spending (G) + Net Exports (X=Exports-Imports)

Let's now get the data for each and every component.

• Consumption (C):

As can be seen from the above chart, India's household consumption as a percentage of GDP in 2018 is approximately 60%. From the highs of 87% in 1960, it has come down to 60%.

• Investment (I):

As can be seen from the above chart, India's Investment as a percentage of GDP is approximately 27.8% in Quarter 3, 2019 (July - September 2019). Investment as a percentage of GDP is hovering below 30% since 2014. Investment as a percentage of GDP was highest in 2008.

• Government Spending (G):

As can be seen from the above chart, government spending as a percentage of GDP fluctuates between 11 - 12%. In 2018, government spending as a percentage of GDP was 11.23%. The highest number recorded in recent history was in 2000 when government spending as a percentage of GDP was 12.18%.

• Net Exports (X):

Net Exports X = Exports - Imports. Therefore, let's assess exports as well as imports individually.

Exports as a percentage of GDP

As can be seen from the above chart, the exports as a percentage of GDP were 19.74% in 2018. Exports as a percentage of GDP are falling since 2013.

Imports as a percentage of GDP

As can be seen from the above chart, the imports as a percentage of GDP were 23.64% in 2018. Imports as a percentage of GDP have fallen since 2012.


Therefore, having gathered all the data, now, let us do the simple calculations for the year 2018.

E = C + I + G + X
E = 59.39 + 31.31 + 11.23 + (19.74 - 23.64)


We can do this simple calculation for any particular year. The results for 2019 are more or less along the same line.

Therefore, let us now come back to the question 'What will be the effect of the coronavirus on the already slowing Indian economy'? or 'Are global factors negatively impacting the Indian economy'? or 'Is a recession coming'? All these questions are loosely talked about on various forums without looking at the facts.

And the fact of the matter is India's net exports (X=Exports-Imports) are negative or at most they can be neutral. In other words, India is a net importer country.

Therefore, the question that shall be assessed is how will global factors impact India's economy when we are a net importer country?

The impact of Coronavirus on India's exports will be negligible as India's 3 biggest exports destination are the USA, European Union, and UAE. China comes in 4th position.

The impact of Coronavirus on India's imports will be felt for some time as India's largest importing partner is China. And India imports a variety of manufactured goods from China.

But if analyzed with a deep concentration, wouldn't this have been an opportunity for India to build its manufacturing capabilities? Rising wages in China for many years and now the outbreak of Coronavirus in China should have been an opportunity for India instead of the threat. Since India's trade deficit with China is in excess of 60 billion US$. Wouldn't this have been an ideal opportunity for India to get its act together and focus on the manufacturing sector? Shouldn't the Make in India program have resulted in India becoming a net exporter country instead of the net importer country?

Therefore, as per the numbers, it is clearly evident that since India is a net importer country, the impact of Coronavirus or any other global factors shouldn't have ideally slowed down the Indian economy.

The slowdown in the Indian economy is more internal. The charts clearly show that. India's Consumption (C), as well as Investment (I), are falling consistently. And India's Consumption, as well as Investment, roughly constitute 90% of India's GDP. And when these 2 parameters are falling, surely, the economic growth will come down as well. And that is where the problem lies.

Therefore, instead of blaming the Coronavirus or other global factors, we should internalize the reasons for the slowdown. We should internalize and assess why Consumption, as well as Investment rates, are falling in India.

Coronavirus and other global factors should have become our opportunity instead of the threat. However, since we haven't focused on building our manufacturing capabilities especially bottom-up manufacturing capabilities, we are feeling threatened by Coronavirus and other global factors. It's still not late, we can turn this into an opportunity provided we build our manufacturing sector. It is the ideal time for India to become a net exporter country instead of the net importer country. Problems in China should not become a problem for us, instead, they should become an opportunity for us.