Launched by the Narendra Modi-led government last September, the “Make In India” initiative is a long-term, top-down driven policy to transform India into a global manufacturing hub. The 25 economic sectors targeted by the Indian government for export-led development were those determined to possess global trade comparative advantages or significant potential for innovation and job creation. Some of these sectors include: automobiles, aviation, biotechnology, chemicals, defense, electrical machinery, food processing, media & entertainment, pharmaceuticals, railways, renewable energy, and textiles & garments.
In my recent weekly newsletters–and in my March 4, 2015 Forbes column (“Modi’s Budget Boosts Bullish Outlook for Indian Stocks“)–I have chronicled and discussed the recent re-acceleration of India’s economic growth due to a combination of government reform efforts and the decline in oil prices, the latter of which provided an immediate 3%-3.5% boost to India’s annual GDP. Since August last year, I have asserted that India’s economic growth rate would surpass that of China; this year, I expect India’s GDP to grow at about 8%–higher than China’s expected GDP growth rate which I expect to come in at 7% or below.
Recent economic data–such as April’s industrial production year-over-year growth of 4.1% (surpassing consensus by more than 200 bps) and May’s benign CPI reading of 5.0%–suggests that my Indian economic outlook is on track. With the Reserve Bank of India’s policy repo rate still at 7.25%, there remains significant room for the Indian central bank to ease monetary policy in order to maintain the country’s high growth rates, as long as the CPI reading stays below 6.0%.
I maintain that India’s long-term growth trajectory remains intact; I expect the size of India’s economy to double by the end of 2020–to $4 trillion or more–and for the earnings of the MSCI India equity index to more than double in the same time frame. In the past, I have discussed several reform policies and trends that would act as secular tailwinds for the India economy, including: 1) a concerted crackdown of cronyism and corruption and raising foreign direct investment caps from 26% to 49% in the insurance and defense industries–both of which would heavily encourage more FDI inflows into India, 2) a renewed focus on infrastructure investments–including a nationwide 4G network–as well as much-needed land reforms to encourage further industrialization, 3) rising confidence in the leadership of the Reserve Bank of India as Governor Rajan asserted the central bank’s independence with an inflation-targeting framework that was recently codified into law, and 4) India’s uniquely young and educated workforce.
I consider the “Make in India” initiative to be a major policy focus that is essential to India’s long-term economic development. Unlike China’s “growth at all costs” policy from 1978 to 2008–i.e. a 19th century style command-and-control network of various centralized systems of production–while taking advantage of low-cost labor and lax environmental regulations, India is encouraging the production of higher value-added goods through a more decentralized approach of empowering decision-makers at the corporate level. At the same time, India’s labor laws have historically offered a high degree of protection for workers. To a major extent, India’s historical rejection of the 19th century style of command-and-control capitalism has limited the country’s industrialization and consequently, its export sector of manufactured goods. Of course, over the last 25 years, India’s exports have increased both as a share of GDP and world exports–but this was mostly driven by increases in the exports of services and primary products & resources (i.e. rice, cotton, diamonds, iron ore, etc. )–as opposed to the exports of medium- and high-tech manufactured goods.
Figure 1: India – Exports of Goods and Services, 1991-2013 (source: IMF)
Since 1991, total Indian exports as a share of Indian GDP rose from around 8% to almost 25% in 2013; while Indian exports as a share of world exports tripled from around 0.5% to 1.7% during the same time frame. Of note, however, is the rapid increase in Indian service exports in just the recent decade. From 2000-2013, Indian services exports as a share of world services exports have tripled to over 3.0%.
Growth in Indian services exports has been rapid; indeed, it has surpassed that of other EM countries by a wide margin (see Figure 2 below). Indian services now make up 35% of all of the country’s exports, which is even higher than the average in advanced economies.
Figure 2: Growth in Services Exports – India and EM Countries, 2000-2012 (source: IMF)
The vast majority of fast-growing EM economies over the last several decades relied on industrialization and subsequent growth of manufacturing exports (both absolute and relative to total exports) to jump-start their economies. In 2013, for example, China’s manufacturing exports accounted for 90% of total exports, double the share during 1980-85. The share of Indian manufacturing exports as a share of total exports, however, has actually declined over the last 15 years, due to India’s over-reliance on growth driven by the services and primary goods & resources industries. Within the goods sector, the share of manufacturing has declined over the last decade as well (see Figure 3 below).
Figure 3: Composition of Goods Exports for Selected EM Countries, 2000-04 vs. 2007-11
To jump-start the “Make In India” initiative to turn India into a global manufacturing hub, I believe the following three key policies need to be adopted–either at the public- or private-sector level.
- Build human capital and liberalize the Indian labor market: Consensus suggests that the Indian manufacturing sector faces an existential problem when it comes to labor: despite a young, educated labor force, there is a shortage of qualified labor for the sector, as those who are qualified do not want to work in manufacturing. One way to entice workers into the industry is to focus on medium-tech or high-tech goods requiring innovation in an effort to boost the technological capacity of India and to raise manufacturing wages. Labor law reforms, along with a policy to integrate manufacturers into the education ecosystem, are also necessary in order to boost the competitiveness of the Indian manufacturing sector in the global markets;
- Investing in export- and manufacturing-related infrastructure: IMF studies have shown that bottlenecks among the energy, mining, transportation, and storage sectors have inhibited India from taking advantage of the devaluation of the Indian rupee over the last several years. Land reforms is also part of the economic agenda, as regulations have historically prevented or limited the rise of industries in urban areas, where most skilled labor is located;
- Trade reforms to expand trade in the long-run: Historically, the Indian government has utilized trade policy as a tool to address short-term objectives such as limiting inflation or minimizing the volatility in commodity prices. Such incoherent policies included export taxes, minimum export prices, and ad hoc adjustments to import duties. The World Trade Organization noted that in its last review, minimum export prices for onions, sugar, and potato were changed in order to control the domestic supply of vegetables. Such policies increase uncertainty for both exporters and importers – major trade reforms are thus needed to provide a long-term boost to Indian manufacturing exports.