Make in India program: Impact of COVID-19 pandemic

“If we have to put in use education, the capability of the youth, we will have to go for the manufacturing sector and for this Hindustan also will have to lend its full strength, but we also invite world powers. Therefore, I want to appeal to all the people of the world over, from the ramparts of the Red Fort, come, make in India, come, manufacture in India. Sell in any country of the world but manufacture here. We have got skill, talent, discipline, and determination to do something. We want to give the world a favorable opportunity to come here, come, make in India…”

– Prime Minister Narendra Modi, 15 August,2014

Make in India is a national program introduced by the Government of India, launched as a response to the emerging market bubble burst in 2013 when India’s growth rate fell to five percent, being the lowest in the decade. It was designed to encourage investment, promote creativity, enhance skill growth and protect intellectual property. The primary aim of this initiative was to draw investment from around the globe and to boost the manufacturing sector in India.

The Make in India program is crucial for India’s economic growth. It aims to use the existing Indian talent base to develop further. Furthermore, it looks at improving India’s rank on the ease of doing business (EDB) Index by eliminating the unnecessary laws and regulations, making bureaucratic processes easier, making the government more transparent and accountable.

Why Make in India?

India’s growth seems to have been led by the services sector for the past two decades. This approach had paid off in the short-run, and India’s IT and BPO sector saw a spike, with India often being referred to as the ‘back office of the world’. However, even though the share of the services sector in the Indian economy witnessed a rise to 57% in 2013, it contributed to only 28% in the share of employment. Therefore, the manufacturing sector needed to be augmented in order to boost employment. This is a result of the services sector having low absorption potential currently with regards to the demographic dividend in the country.

Another reason to launch the program is for the poor condition of manufacturing in India. The share of manufacturing in the economy is only about 15%. This is way lower in comparison to our neighbors in East Asia. There exists an overall trade deficit when it comes to goods. The trade surplus in services covers only one-fifth of India’s trade deficit in goods. The services sector alone cannot overcome this deficit. Manufacturing will have to intervene. The government hopes to encourage businesses, both Indian and foreign to invest in manufacturing in India, which will help this sector and also generate employment in both skilled and unskilled levels.

Studies show that, focusing on manufacturing is important as no other sector seems to have such a huge multiplier effect on economic growth in a country. The manufacturing sector has larger backward linkages and hence,growth in demand in manufacturing spurs the growth in other sectors as well. This further generates more jobs, investments and innovation, and generally results in a higher standard of living in an economy.

Impact of COVID-19 on Make in India

The handling of the COVID-19 pandemic situation by China has not only fueled anti-Chinese campaigns but has also impacted the trade aspect with China. The dependence on raw materials and made in China goods has been immense all over the world and nations are now rethinking their trade ties with China.

Since 1978, when China initially began the reforms in its economy, its GDP had averaged about 10% a year. The World Bank data of 2018 suggests that China in 2018 had $14 trillion GDP growth, which was an increase of more than $2 trillion in comparison to 2017. But all this could change. The fear psychosis around the world due to Chinas’ handling of the COVID-19 pandemic has led to a number of developments such as the US denying entry to shipments from China into its ports. India revised the FDI to get rid of the takeovers or acquisitions of Indian companies which were aimed directly at China. The case here in point is the buying of shares by Chinese investors of a major private sector bank in India. India also cancelled its orders for ‘faulty’ rapid COVID-19 test kits. India’s GDP is estimated to grow at 1.9% in FY2021 which makes it the only other economy other than China which will grow. A lot of its growth could be as a result of a post-COVID-19 world with an anti-China sentiment.

There have been overtures made to the Indian government by some countries hit by the pandemic seeking alternatives to manufacturing in China. The US, for instance, can look for alternatives in low-cost production areas like India, Bangladesh or Thailand. However, only time will tell as to how the US and the rest of the advanced countries respond to China in the post-COVID-19 phase. Many organizations mainly from South Korea and Japan have initiated a dialogue within themselves to migrate their productions to economies like India, Vietnam and Thailand.

Close to about 200 American organizations had decided to shift their manufacturing bases from China to India mid-2019. This could accelerate post-COVID-19. Several American organizations like the FedEx have evinced interest in developing logistic centers for the Jawar Airport Boston Scientific has plans to set up a medical equipment plan.

The world is now looking at alternate hubs of manufacturing and sourcing, however, that might not be possible immediately but nations like India can step up to the challenge. By promoting the Make in India manufacturing sector, boosting the agro based economy by implementing policies that promote lower prices the Atma Nirbhar scheme could give the much-needed push to the business operations in India. The Government plans not only to offer fiscal incentives to domestic and foreign manufacturers to manufacture locally but to also increase import duty to make imports expensive.

India is not only a huge market for investors but with a population of 1.3 billion, more than 60% of the populace under 25 years of age, the inexpensive workforce and a strong democracy makes it a viable place for doing business. However, even though the ease of doing business in India has improved in recent years, it remains a very complex ecosystem and does not undermine the importance of infrastructure, which remains extremely poor in India. These factors could play spoilsport. It is also an attractive destination in the medium to long term basis because of its high share of working age population. The Indian Government has been giving out new incentives that aim at making India an attractive investment destination for manufacturing companies. A thorough review of import duties with the aim of encouraging manufacturing, deep cut in the corporate tax rate to 22% for existing companies and 15% to new ones, and an import duty hike on a host of products, from footwear and furniture to electrical appliances and toys, in the February 1 budget for 2020-21, are few measures taken to help the industries.

The government announced a Rs 20 lakh crore stimulus package which focused on tax breaks for small companies, as well as incentives for domestic manufacturing. The Rs 3 lakh crore collateral-free assistance handed out to MSMEs will help crank up their operations. This move could help in the recovery of India’s factory output, which fell to record lows in March, with the Index of Industrial Production contracting 16.7%. As per records, the manufacturing sector output slumped 20% in March, while electricity generation shrank almost seven percent. All categories of manufacturing industries showed a contraction in production in March, with the worst affected being auto (50% decline) and computer & electronic products sectors (fell almost 42%).

There is immense opportunity in making India an additional export base, rather than restricting it to just a producer for domestic markets. China’s increasing wages have forced global value chains to look for some other destinations. In 2019, the Indian smartphone market surpassed the US for the very first time, reaching 158 million shipments with a seven percent YoY growth. The market primarily grew due to the aggressive promotion and pricing by the Chinese brands. Even though China makes up for around 70% of the global phone exports, India still has got 15% of this share, with Vietnam emerging as a key player with around 10% of such exports.

A newly notified scheme for over Rs 48000 crore by the Ministry of Electronics and Information Technology to promote electronics manufacturing has been announced, as it wants to utilize the opportunity in making India an alternative to China. Major brands have set up their manufacturing facilities and some companies have sub-contracted manufacturing to electronics manufacturing services (EMS) companies operating from India. Technology giant Apple plans to produce up to $40 billion worth of smartphones in India and move almost a fifth of its production capacity from China to reap benefits of the new production-linked incentives (PLI) scheme, which offers a 4-6% incentive for local production. Similarly, mobile player Lava International will shift its production and design center for the export market from China to India within six months. India has also experimented with high custom duties (5-10%) on the imports of mobile phones and their parts.

As the world gets apprehensive to import agricultural produce from China with caution, this is where India can score. As a part of the Atma Nirbhar scheme, a slew of incentives for the agriculture sector and allied activities have been announced which will help in building cold chains and post-harvest management infrastructure. The Centre will establish a legal framework that would enable farmers to engage with the processors, aggregators, large retailers, and exporters in a free and fair manner. A Rs 10,000-crore scheme will help in formalizing micro food enterprises. Funds are allocated to dairy processing, herbal cultivation, and beekeepers. Since India is also an exporter of rice, tea, meat, milk products, honey, horticultural and organic products, these will also have to overcome the challenges posed by the pandemic.

The COVID-19 pandemic be an opportunity but there is a need to introduce structural reforms like significant labor and land reforms, allowing businesses to hire and fire, hand holding investors, direct tax benefit in SEZs and plug-and-play facilities. India has the required manpower, but skill levels fall short and government rules are relatively restrictive in nature. This is an opportunity for India to ramp up market access and seize its place in the world economy. In conclusion, MAKE IN INDIA has led to a series of developments in a wide range of spheres. Moreover, the impact of the pandemic has also changed the market structure of the Indian economy.

Bibliography

Author: Anoushka Bakaya
Grade-12, Heritage Xperiential Learning School
Gurgaon, India