Author : Soumya Bhowmick

Expert Speak India Matters
Published on Aug 19, 2020

The ‘Make in India’ scheme launched in 2014 could be the starting point in galvanising the economic resurgence in post-pandemic India.

Covid-19: Breathing new life into ‘Make in India’

The Covid-19 pandemic has resulted in the disruption of trade and investments, especially for sectors such as tourism and manufacturing. A global economic downturn of unprecedented orders is on the cards. The over-dependence on Chinese manufacturing, especially in times like this, is hurting the global economy as China accounts for 12 percent of the world’s GDP growth rate. The US-China trade war along with the strained diplomatic ties with China over the Covid-19 crisis has led to global investors looking for other countries such as India, Bangladesh, Thailand and Vietnam for shifting their manufacturing activities. In this context, the pandemic could be converted into an opportunity to make India a manufacturing hub and expand its export base that could be operationalised by India’s flagship ‘Make in India’ initiative.

The ‘Make in India’ scheme launched in 2014, could be the starting point in galvanising the economic resurgence in post-pandemic India. This programme was well designed to “facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure” in India. The primary objective of this initiative was to attract investments from across the globe and strengthen India’s manufacturing sector.

"Although, the service sector has the highest FDI inflows that contributes to approximately 17 percent of the total FDI volume into the country, the exit of manufacturing bases from China will aid ‘Make in India’ targets to grow the manufacturing sector’s share in India’s GDP."

With regard to Foreign Direct Investment, the aim was to create a business-friendly environment for investors and help create successful interlinkages between investors, manufacturers and the human capital within the country. FDI has been on the rise since the launch of ‘Make in India’ in 2014 — in FY 2019-20 India recorded an all time high of $73.45 billion in FDI inflows. Although, the service sector has the highest FDI inflows that contributes to approximately 17 percent of the total FDI volume into the country, the exit of manufacturing bases from China will aid ‘Make in India’ targets to grow the manufacturing sector’s share in India’s GDP (from the current approximate figure of 15 percent to 25 percent by 2025).

There are however two primary barriers to this. Firstly, a point of concern remains that the production cost (mainly land and labour expenses) in Southeast Asia is 12 percent lower than that in India, prompting investors to prioritise other nations in the region such as Vietnam, Thailand, etc. Although the market size present in India might offset the production cost difference by 6-7 percent, the remaining gap needs to be made up by implementing incentives at regional levels.

Secondly, another concern for the growth of the Indian economy is the state of labour productivity. According to an analysis of the Annual Survey of India data, India’s labour productivity has been on a downward spiral for the last 8 years. The importance of highly productive human capital base is immense as it ensures effective usage of resources. With investors trying to move out of China, it is imperative that businesses and the government ensure an environment of high labour productivity through labour up-skilling in order to tap into the opportunities that lie ahead.

"The importance of highly productive human capital base is immense as it ensures effective usage of resources."

With respect to other Southeast Asian countries trying to capitalise on the current situation, Singapore has already been an early gainer in this domain. Indian state governments such as that of Telengana and Tamil Nadu are also stepping up in attracting firms to Hyderabad and Chennai respectively. Earlier, in September 2019, the corporate tax in India was reduced to 17 percent for new entrants in the market (which is lower than in Southeast Asia).

India’s Northeastern region should also be given a renewed focus to facilitate the country’s Act East Policy, which is seen as a crucial alternative to its non-participation in China’s Belt and Road Initiative (BRI). The Northeastern states could potentially connect the product markets between the larger Indian geography along with the robust Southeast Asian economies, which in turn makes the Indian economy more competitive for foreign investments.

In the same vein, several multinational companies have expressed interest in shifting their value chains to India which will ensue in the country’s growth opportunities. Japan has pledged $2.2 billion to facilitate companies to relocate their production out of China and into India. German footwear company — Von Wellx is set to completely relocate its production from China to Agra in India. More recently, as companies are bound to restart and diversify the disrupted supply chains, about 24 companies (assembly partners of big players ranging from Apple to Samsung) have pledged to set up mobile-phone factories in India which amounts to an estimated $1.5 billion of investments. India must leverage on this dilution in the Chinese dependency of developed economies such as US, Japan, Germany, UAE and France by simultaneously boosting its complementary ‘Make in India’ campaign.

"The Northeastern states could potentially connect the product markets between the larger Indian geography along with the robust Southeast Asian economies, which in turn makes the Indian economy more competitive for foreign investments."

The global economy could revive from this recession by early next year only if the supply side constraints can be contained with parallel revival in consumption demand. Analysing this in the Indian context would entail making the Indian economy more competitive by making its product and input markets robust in comparison to the nation’s Southeast Asian competitors. In a post-pandemic situation, countries are expected to look towards India for processed food, marine produce, meat, fruits and vegetables, tea, rice and other cereals due to the underlying apprehension in importing edible products from China. Against this backdrop, the time is now ripe to convert India's flagship ‘Make in India’ campaign into a global manufacturing phenomenon.

Additionally, the Prime Minister’s clarion call of making India ‘atmanirbhar’ (self-reliant) and being ‘vocal for local’ must have its foundations in increasing the efficiency of domestic production and consumption processes. At a time where there are too many uncertainties and one cannot rely on the vagaries of global trade and finance, it is imperative that India creates a very robust domestic economic system through consumption and investment demand. A potent example of ‘self-reliance’ is the domestic production of Personal Protective Equipment and N-95 masks, which reduces India’s dependence on China for importing necessary equipments amidst the Covid-19 crisis. However, despite India’s focus towards conversion of global economic processes into domestic mechanisms, the importance of making India attractive to foreign investments through ‘Make in India’ cannot be denied in fuelling India’s growth story in the post-pandemic world.

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Author

Soumya Bhowmick

Soumya Bhowmick

Soumya Bhowmick is a Fellow and Lead, World Economies and Sustainability at the Centre for New Economic Diplomacy (CNED) at Observer Research Foundation (ORF). He ...

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