India’s economic growth for 2016-17 stands at a staggering 7.3% yet the country cannot create enough jobs to lift its people from poverty even when having a labor force of 500 million people. Yet 49% are employed in the agricultural sector which only contributes to 14% of the country’s economy.
It’s these contradictions that Prime Minister Narendra Modi wants to change under the Make In India project. This initiative seeks to transform India into a manufacturing hub for vehicles electronic systems pharmaceuticals as well as a hub for hydrocarbon and nuclear energy. This colossal task is the greatest economic reform in modern Indian history that seeks to unleash country’s true potential. Yet change comes at a price. In this report we will analyze the make in India initiative and explain what obstacles the Prime Minister faces and how he intends to solve them.
Primary purpose behind the make in India initiative is not just to transform the economy but to create new jobs. This is one of PM Modi’s top economic priorities. In a land of 1.2 billion people it should come as no surprise that every month nearly a million citizens enter the job market. This makes managing unemployment in India a daunting task. PM Modi’s plan to stimulate economic growth starts with reforming the labor legislation. Presently Indian labor laws make it very hard for companies to accelerate growth thus even though the economy grows at a pace of 7%, it has not yielded more jobs. As a result instead of seeking formal jobs the majority of Indians turned to the informal market. This includes jobs with no fixed incomes and systematic work conditions; such as construction workers mechanics shopkeepers. Currently about 80% of Indians (500 million labor force) is employed in the informal economy.
Ironically Indian labor laws which were meant to protect workers in a formal economy have actually hurt the job market and stimulated an informal economy and poverty. Hence, PM Modi is seeking to pass several legislation that would reform the labor laws. He has already reduced a number of labor laws from 44 to just 5 core legislation, improving the ease of business in India. For example, company registration has become super fast with digitization of whole process. However, the Prime Minister has reached a political dead end. For instance, in September 2015, labor unions affiliated with the political opposition party, Indian National Congress, who represent about 150 million workers launched a nationwide strike. Since then, PM Modi has backed down and there have been no signs that further the core labor laws will change anytime soon. Since his labor laws reforms have reached a political stalemate.
But PM Modi has shifted to stimulate growth by manipulating the monetary policy, in other words, by cutting the interest rates. But here too, PM Modi has reached an impasse. Raghuram Rajan and Urjit Patel the former and present chief executives of the Reserve Bank of India have refused to lower the interest rates below 6.5%. Both men argued that by cutting interest rates Indian banks would give out more loans creating more jobs and small businesses but it would also devalue the currency, meaning inflation would rise. Though, many will argue that leaders must focus on long-term objectives.
However, as an elected official while these actions have electoral consequences, many of his objectives tend to focus on short-term policies. On the other hand Rajan and Patel as appointed public officials have the freedom to focus on long term objectives. So even though PM Modi fully understands that inflation will hurt the economy in the long term, he needs to present short-term results. Rajan resigned from his office in early September yet before he left he established the monetary policy committee. This group consists of six people is responsible for setting the interest rates. Thus even in the absence of Rajan, PM Modi will have a hard time adjusting the interest rates. Ultimately though monetary manipulation is not a substitute for genuine growth.
PM Modi’s desire to reform the economy also depends on the business environment which requires a decent infrastructure and clear tax regimes. According to the government’s five-year plan India needs to invest about one trillion dollars to modernize its railways ports roads highways bridges, digitizing its economy and more. This estimate for 2012 to 2017 amounts to 200 billion dollars annually. However India’s national budget for 2016 stands at 289 billion dollars. In other words, New Delhi does not nearly have enough money to modernize the infrastructure by itself instead. This needs to be funded by the private sector to raise the necessary funds. PM Modi must rely on foreign direct investment.
The attempts to acquire more investment is already yielding results. In 2015, India received a record 40 billion dollar in foreign direct investment, which is an increase of 30 percent compared to the previous year. Yet as high as this amount is not sufficient to fully modernize the business environment India requires. An annual foreign direct investment of at least 100 billion dollars, in fact, the total amount of required foreign direct investment is even higher when one considers the other segments of the economic reforms. The make in India initiative also seeks to increase the manufacturing sector share of the economy from 16% to 25% by 2022.
The government believes that this would yield in at least 100 million jobs in the manufacturing sector and this is where the Make In India initiatives comes full circle for India to achieve such goals and to attract the necessary foreign direct investment. New Delhi must perform its labor and land acquisition laws as well as its tax regimes as improving the business environment also depends on land acquisition laws, better tax system with GST and digitizing of various process. Government of India has made securing Intellectual Property Rights completely digital one superb example is Trademark Registration, which is online and is processed in a few days.
Currently India’s land acquisition law of 2013 requires companies to obtain approval from at least 70% of the local residents before acquiring the land. Since nearly 70% of Indians live in villages the acquisition law complicates matters for companies seeking to expand their base of operations in India. PM Modi is trying to adjust the acquisition law but since the legislation has a direct impact on the majority of Indians it’s an extremely difficult task. One more legislation that the Prime Minister is seeking to adjust is the Goods and Services Tax bill, also known as GST bill. Basically the legislation seeks to introduce value-added tax in India which is a common consumption tax in Europe and many other countries. For outsiders this is hard to imagine. But in India every state has a different tax code as a result one cannot freely transport goods within India. Instead one has to stop at the state borders and pay the entry tax. The biggest complication with these tax regimes is not the tax fee but the dreadful paper work which can take up those several hours.
Obviously, this hinders further economic growth. PM Modi is successfully able to pass GST bill which is most revolutionary tax change in India ever since its independence. This will further boost Indian economy.
