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.

Manufacturing a car is easy while manufacturing a toy is difficult in India? Why?

In a group discussion recently, this question came up. How the hell car making in India is easy whereas toy making is so difficult? How come India is able to produce cars and bikes of great quality and yet why can’t India manufacture simple plastic toys? Despite the launch of the Make in India project in 2014, why are our markets flooded with Chinese toys? 

For most people including the general public, media, economists, bureaucrats, there seems to be no answer to this dichotomy. However, a person working in the manufacturing sector understands the reasons behind this.

Firstly, for the general public, media, economists, bureaucrats, the overall perception is that manufacturing is one sector. However, this perception is so far from reality. Manufacturing comprises subdomains. However, it’s unfortunate that these very economists and bureaucrats then go on to make policies for the manufacturing sector as a whole including the framing of Make in India policy. It is evident that these economists and bureaucrats have no understanding of an extremely hard and technical subject such as manufacturing. 

For the sake of simplicity, manufacturing can be divided into 2 subdomains namely top-down manufacturing and bottom-up manufacturing. The Make in India policy could not differentiate between these 2 approaches as well.

Car manufacturing comes under the ambit of top-down manufacturing whereas toy manufacturing comes under the ambit of bottom-up manufacturing.

In a typical top-down manufacturing approach, a large company, let’s say an automobile company looks at the demand for cars and the size of the sector in India. Having gathered this market insight, this automobile company then decides to manufacture the cars in the country. This company brings in capital, technology and sets up a plant and starts manufacturing the cars. This car manufacturing company sets up the entire plant including the tool-room, production line, assembly line, etc. 

Once this car company sets up operations, the component manufacturing companies come up to supply different parts and components to this car company. Different parts and components such as brake system, clutch system, gear system, suspension, piston, flywheel, nuts/bolts are produced by many component manufacturing companies. As the demand for cars grows and the overall size of the car industry becomes large, then other car making companies set up plants. The component manufacturing companies supply parts and components to all these car manufacturing companies. The whole ecosystem evolves and the country becomes a car manufacturing hub. All of this happens not because of the Make in India policy, but because of the demand and the size of the Indian market.

India’s total manufacturing output in 2018 was nearly 403 billion US$. And approximately, 50% of this total manufacturing output came from the automobile sector alone.

On the other hand, in a typical bottom-up manufacturing approach, an idea originates in an entrepreneur’s mind. The idea could be anything. The idea to produce toys, souvenirs, sculptures, plastic goods, etc. Kindly note, no big company will produce these simple common household goods. Only an entrepreneur can take the plunge and test the idea. However, as soon as the entrepreneur decides to produce these goods in India, then, he or she is faced with the challenges of Tool-room, production, assembly. An entrepreneur does not have resources or money to set up all these facilities. He or she needs access to these world-class facilities. And there are no world-class facilities in India. Under the Make in India initiative, the policymakers could not identify the need to provide support to entrepreneurs.

In a top-down manufacturing approach, a large company could set up all the facilities such as the tool-room, production line, assembly for its operations. This requires a huge amount of investment. However, in a bottom-up manufacturing approach, the entrepreneur does not have access to all these facilities. Only the state or the government of the day can facilitate the development of these world-class facilities in partnership with private players. And since India lacks these world-class facilities, an entrepreneur becomes a trader instead of becoming a manufacturer. He or she starts buying these simple common household goods from China and then selling them in India.

Therefore, when it comes to the top-down manufacturing approach, the demand and the overall size of the market matters. A large company will gather this information and set up operations. The state or the government of the day does not provide any support other than granting approvals. Well, this large company does not actually need any state support. This company has all the resources, money, technology to produce goods, be it cars, washing machines, mobiles, bikes, etc.

However, when it comes to the bottom-up manufacturing approach, the entrepreneur needs access to world-class facilities. And this is where the state or the government needs to step in. However, since there is no support in India, the entrepreneur becomes a trader. And Indian markets get flooded with the Chinese goods including the simple plastic toys.

Therefore, the question is, can India produce toys in India? The answer is yes, provided, instead of economists and bureaucrats, manufacturing entrepreneurs are involved in the 'Make in India' policymaking committee.

Is Foreign Direct Investment coming to India going into the Make in India program?

Make in India initiative was launched to boost India’s manufacturing sector. The idea was to encourage Indian entrepreneurs as well as global supply chains to set up manufacturing units in India. Did the program succeed? Did Foreign Direct Investment come into India’s manufacturing sector? 

First of all, let’s have a look at the amount of Foreign Direct Investment that’s coming into India. Since the beginning of 2010s, as per the world bank data, India has received Foreign Direct Investment (FDI) in the vicinity of 30 to 40 billion US$ per year. 

In 2010, India received the FDI totaling 27.4 billion US$. In 2011, it was 36.5 billion US$. In 2012, it was 24 billion US$. In 2013, it was 28.15 billion US$. In 2014, it was 34.58 billion US$. In 2015, it was 44.01 billion US$. In 2016, it was 44.46 billion US$. In 2017, it was 39.97 billion US$. And in 2018, it was 42.12 billion US$.

However, FDI when measured as a percentage of GDP tells a different story. In 2010, India received FDI equivalent to 1.64% of India’s GDP. In 2011, this FDI number was 2% of the GDP. In 2012, it was 1.31% of India’s GDP. In 2013, it was 1.52% of India’s GDP. In 2014, it was 1.7% of the GDP. In 2015, it was 2.09% of the GDP. In 2016, it was 1.94% of the GDP. In 2017, it was 1.51% of India's GDP. And in 2018, it was 1.55% of the GDP. Therefore, FDI in terms of percentage of GDP has not changed much since the 2010s.

Having got the numbers for the FDI, Let’s now understand where this FDI is being deployed. In other words, which are the sectors that received the most of the FDI money. 

As per the data released by the Department for Promotion of Industry and Internal Trade (DPIIT), In the fiscal year 1 April 2019 to 31 March 2020, the services sector received the highest amount of foreign inflows at 7.85 billion US$. The computer software and hardware sector received foreign inflows worth 7.67 billion US$. The telecommunications sector garnered 4.44 billion US$ worth of foreign inflows. The trading sector got 4.57 billion US$ worth of foreign inflows. The automobile sector got 2.82 billion US$ worth of foreign inflows. It was followed by the construction sector at 2 billion US$. And then, the Chemicals sector received foreign inflows worth 1 billion US$. 

This has been the pattern of FDI in India since the 2010s. Therefore, as is clearly evident from the above data, the manufacturing sector continues to lag behind even when it comes to garnering the FDI. And there is no surprise, since the launch of the Make in India program in 2014, India’s trade deficit with China has increased as shown in the graph below. If FDI was going into the Make in India program, then, surely, India's trade deficit with China would not have increased so much from the 2014 to 2018 period.

Year	India's exports to China in Billion US$	India's Imports from China in Billion US$	Trade Imbalance in Billion US$
2014	16.41	54.24	-37.83
2015	13.39	58.26	-44.87
2016	11.75	59.43	-47.68
2017	16.34	68.1	-51.76
2018	18.83	76.87	-58.04
	(Source: General Administration of Customs, China)

Therefore, the question that needs to be asked is why hasn’t India’s manufacturing sector been able to receive the FDI?

There are many reasons for it. However, the principal reason is the lack of manufacturing infrastructure in the country. Even though the Make in India project was launched in 2014, however 6 years down the line, the manufacturing sector still lacks the necessary manufacturing infrastructure. 

Point to be noted here is that the manufacturing infrastructure is different from the roads, ports, electricity, railways which fall under the category of physical infrastructure. Manufacturing is a long and hard game, and it needs state support in terms of high-quality manufacturing infrastructure. With the presence of manufacturing infrastructure, the local entrepreneurs would become manufacturers instead of becoming traders. Once the manufacturing infrastructure is in place, the global supply chains will also start to move to India. No one will have to persuade them to come to India and set up plants in India. They will set up plants on their own. Build the necessary manufacturing infrastructure and local entrepreneurs as well as global supply chains will be tempted to manufacture in India.

Indian businesses won’t be importing simple common household goods from China. Instead, these goods will be produced in India. And after having served the Indian market, the Indian entrepreneurs will be encouraged to export globally-competitive goods to the USA, Latin America, and Europe.

Therefore, it’s high time, Indian policymakers first identify the need to develop the manufacturing infrastructure in the country. And then develop that manufacturing infrastructure. Make in India policy must involve manufacturing entrepreneurs in the formal policy-making roles so that a necessary impetus can be given to building the manufacturing infrastructure on a war footing.

What are some items that are mostly imported from China but can be profitably manufactured in India itself?

Let’s first understand the current situation of manufacturing in India by analyzing the data. As per the world bank data, despite the launch of Make in India program in 2014, India’s manufacturing output in 2018 was 403 billion US$. Point to be noted is that in 2018, China's manufacturing output was 10 times the size of the Indian manufacturing output. In 2018, Chinese manufacturing output stood at a massive 4.003 trillion US$.

Now, let’s again come back to India. Out of this 403 billion US$ of manufacturing output, nearly 50% is generated by the auto sector. Therefore, if we take out the auto sector, then, despite the initiation of the Make in India policy in 2014, India’s manufacturing output in other areas is minuscule for a country with a population size of 1.35 billion.

Therefore, we end up importing simple common household goods from China. Goods like toys, plastic goods, Diwali Lights, electrical items, electronic items, souvenirs, etc. etc. The list of products that we import from China is endless thereby resulting in a massive trade deficit of 60+ billion US$ with China. That’s huge, 60+ billion US$ means approximately 4.5 Lacs Crores Rupees on a yearly basis. If we make all these goods in India itself rather than importing these goods from China, then, that surely will generate Lakhs or Crores of jobs in the country. So, why are not we making these simple common household goods in India given that the very purpose of the Make in India campaign was to boost India’s manufacturing? What is the problem?

Let’s understand this by taking a simple item like a plastic toy that is sold in India but is made in China. Why don’t Indian manufacturers make these simple plastic toys in India itself? To answer this, let us first understand the technical aspects of toys. A typical plastic toy comprises a shape (it could be an animal form, or doll, or human form, etc.). Once the shape or form is defined, then, battery or other accessories are fitted in the toy. It’s so simple and basic.

Now, let’s get going. To make the shape or form of the toy, an Indian manufacturer, or any manufacturer across the world would have to first develop the mold of that shape or form. This is the first step. Well, the first step is the 3D design in the computer, but the first real manufacturing step is the development of the mold to get the shape or form of the toy that we want to manufacture. This mold development step in India takes at least 5-6 times more time than what it takes in China. The Make in India program too failed to focus on these simple basic technical aspects of manufacturing in India. So, when mold development takes a huge amount of time, then, it is clearly understandable that the cost of the final product will rise. Besides the cost, the quality of the mold produced is inferior to what is produced in China. Now, when the shape or form of the toy is not only expensive to make in India but also inferior in quality, then, who will buy the final toy? Therefore, instead of making a simple plastic toy in India itself, our entrepreneurs have no choice but to bring the same toy from China and then sell that toy in India.

The second step in the manufacturing of this toy is getting the other parts. Parts such as the battery, and other accessories. It is true, we have to source these parts from other vendors. And since, when we ourselves are facing the challenges in manufacturing the shape or form of the toy in India, then, it is given that other manufacturers are also facing the same challenges to manufacture batteries and other accessories in India. The Make in India policy framework does not support bottom-up manufacturing and therefore all small scale entrepreneurs and MSMEs face similar challenges. Therefore, even if we are able to develop the shape or the form of the toy, then, it is inevitable, we will end up sourcing some parts from China. Maybe a battery or maybe other accessories. But surely, we would have to rely on China.

The third step is ‘assembly’. Now that you have the mold to make the shape or the form of the toy. And you also have the other necessary parts to make the complete toy. The next step is the assembly. Automating the assembly line would require a huge amount of money, therefore, a small scale entrepreneur or the MSME that decides to make the toys in India would deploy manpower to do the final assembly of the toy. However, manpower in India is not properly trained, therefore, it can take months before the assembly line is perfectly fine-tuned. And no entrepreneur in India wants to wait for months before getting the desired high-quality toy. Therefore, most people would instead bring goods from China and then sell them in India. The Make in India initiative does not give the right tools for entrepreneurs to make goods in India itself.

Therefore, unless and until Make in India policy focuses on boosting and promoting small scale entrepreneurs and MSMEs, we would continue to source simple common household goods from China. Entrepreneurs shall be involved in the final draft of the Make in India policy. The policy shall encourage India’s entrepreneurs and MSMEs. The current policy only focuses on attracting global companies to India. And no global company makes simple common household goods. These simple common household goods can only be made by Indian entrepreneurs and MSMEs. But at the moment, there is no policy support to these entrepreneurs and MSMEs. And therefore, we continue to source simple common household goods from China.

Is Make in India a success?

Prime Minister Modi recently highlighted the importance of ‘self-reliance’ or 'atmanirbhar bharat abhiyan'. He further stressed that the Coronavirus pandemic forces us to become ‘self-reliant’ or 'atmanirbhar'. These words could not have been more true for India’s manufacturing sector, and Make in India program in particular. It is the right time for India to become self-reliant for manufactured products. Will his government act and develop the necessary manufacturing infrastructure in order for India to become self-reliant in the manufacturing sector? Can we boost our manufacturing output from the current 403 billion US$ to 2 trillion US$ in the next decade? It’s a long and arduous journey, but the journey must start now.

As per the world bank data, India’s manufacturing output in 2018 was 403.05 billion US$ (current US$). Whereas China’s manufacturing output in 2018 was 4.003 trillion US$ (current US$). In other words, China’s manufacturing output is nearly 10 times the size of the Indian manufacturing output. With nearly identical population size, India can not afford to be lagging behind in the manufacturing sector.

It is very well established that construction, infrastructure, and manufacturing sectors are the biggest employment generators in any given economy.

The construction sector is a cyclical sector and is currently at its nadir with many stuck projects and consumer confidence at an all-time low. The infrastructure sector has its own challenges pertaining to land and capital. Therefore, focus on the manufacturing sector or enhanced focus on the Make in India initiative at this stage of time will not only give a boost to India’s GDP growth rate but will also generate formal employment at a massive scale besides making India self-reliant. The timing is crucial because of the following 2 reasons:

1. Wages are rising in China since 2006 and therefore companies across the world are looking to develop supply chains in other low-income countries. As we all understand, Production is directly proportional to capital and labor, therefore, there is a massive opportunity for shifting supply chains to countries where labor rates are relatively low.
2. Coronavirus pandemic can be a trigger point for companies across the world to look for an alternative other than China.

However, it will be a herculean task for other low-income countries including India to tap into this opportunity because of the lack of Preparedness. Therefore, the question that arises is how can India prepare itself to tap into this opportunity? This is possible by developing the manufacturing infrastructure in the country. Only manufacturing entrepreneurs understand the various elements of the manufacturing infrastructure which is completely different from the physical infrastructure such as electricity, roads, ports, railways, etc.

Before focusing on the need to develop the manufacturing infrastructure, we as a society need to distinguish between the ‘top-down manufacturing approach’ and the ‘bottom-up manufacturing approach’.

In a top-down manufacturing approach, a large company (domestic or multinational) sets up a plant and then ancillary units come up to supply different parts to this large company. India’s auto sector is an example of the top-down manufacturing approach. This approach is also known as capital intensive manufacturing. Robots and hi-tech machinery are deployed to manufacture products. Therefore, employment generation in this kind of manufacturing approach is limited.

On the other hand, in a bottom-up manufacturing approach, an entrepreneur comes up with an idea to manufacture a product. This idea could be about anything such as toys, electrical items, souvenirs, electronic items, common household goods, etc. However, an Indian entrepreneur does not manufacture these goods in India and instead source these goods from China. No wonder, our trade deficit with China is rising year after year. Why can’t an Indian entrepreneur manufacture these goods in India itself? The answer lies in the lack of manufacturing infrastructure that we just talked about.

Without proper manufacturing infrastructure in place, it becomes difficult for an entrepreneur to manufacture simple common household goods in India itself. So, what are the elements of the manufacturing infrastructure that India needs to develop in order to tap into this big manufacturing opportunity? Here is a list based on the ground experience of entrepreneurs working in the manufacturing sector in India:

1. Involvement of startup entrepreneurs in the policymaking process for the manufacturing sector
2. Development of the tool-room technologies across India
3. Development of the concept of ‘manufacturing society’ to grant approvals at a faster rate and to achieve economies of scale
4. Financial support to manufacturing entrepreneurs
5. Enhanced focus on the technical skill development programs across India

The above 5 elements form the nucleus of the manufacturing infrastructure. Each and every single element is a study in itself and therefore it is beyond the scope of this article to explain these 5 elements in detail. With the manufacturing infrastructure in place, an Indian entrepreneur will be encouraged to manufacture goods in India itself rather than trading the same goods from China. India’s trade deficit with China is in excess of 60 billion US$. In other words, nearly 2% of India’s GDP. The manufacturing of these goods within India itself will propel India’s yearly GDP growth rate by 2%. Moreover, Indian entrepreneurs after having tasted success at home will be much more confident to export globally-competitive goods to the USA, Europe, Latin American markets.

Additionally, with this manufacturing infrastructure in place, companies across the world will be encouraged to shift supply chains to India thereby further boosting the Make in India program. The bottom line is, ‘we as a society will be competing on our strengths rather than the extraneous factors originating in China’.