3/27/2016
Indian Prime Minister Narendra Modi
India received $222 billion in investment pledges at the “Make in India Week” in Mumbai last month. Prime Minister Narendra Modi’s signature initiative, to transform his country into a “global manufacturing hub,” is catching fire.
Modi announced his “Make in India” plan in September 2014, shortly after coming to power in a landmark election, and selling the initiative around the world has been the easy part for the reform-minded, charismatic leader.
Foreign direct investment into his country is on the verge of overtaking that of both the United States and China. That’s not too surprising because Modi’s got a great story to tell. India, after all, is by far the most promising of the BRICS.
The countries represented by the first two letters, Brazil and Russia, have contracting economies and face intractable problems across-the board. The “C,” China, is heading into a debt crisis as growth stalls and money flees. South Africa, the “S,” is limping.
The “I,” however, is roaring ahead. India has the highest growth rate of all the BRICS—the IMF predicts 7.3% GDP growth this fiscal year and 7.5% next year—a relatively stable and open political system, and a near-perfect demographic profile.
If you can remember only one projection about the world, make it this one: the UN tells us that India will become the planet’s most populous country in 2022. Some believe that will happen even sooner, perhaps 2020. Whenever that occurs, it will be the first time in 300 years—and perhaps all recorded history—that China will not hold the world’s population crown.
By mid-century, India’s workforce—people aged 15-59—will number 1.05 billion. Indian leaders, therefore, need to figure out how to keep them all employed. Modi’s solution is Make in India.
It is not as if Modi’s plan is novel. In East Asia, it has been tried, with great success, in Japan, South Korea, Taiwan, Singapore and China. Malaysia prospered with its factories, and Vietnam and Bangladesh are now taking that route.
The question the Indian prime minister faces, therefore, is whether he is too late to the manufacturing game.
Next door to his country is the nation often described as “the world’s factory,” and some say no other will ever replace it. Today, however, its manufacturing sector is ailing. Beijing’s National Bureau of Statistics reports that industrial output increases month after month, but other official figures point to a contraction at least a year old. So do purchasing managers’ indexes.
China’s manufacturing sector, whether growing or not, suffers from world-class overcapacity, with more and more factory lines slowing to idle-speed. Beijing’s solution is to close some factories and flood the world with cheap goods from the others, but debt-laden consumers are in no position to increase spending.
Not surprisingly, therefore, China’s exports have been declining, down 2.8% in 2015 and 17.8% the first two months of this year. They fell not because of eroding Chinese competitiveness but because of a deteriorating global economy. China’s exports, although dropping in absolute terms, have essentially maintained their share of the world’s total.
Looking at China’s predicament, a growing minority in India say their country should not add to the world’s factory glut. Others believe India cannot afford the pollution that comes with industrialization. Cathy Holcombe of the South China Morning Postreports that already 13 of the world’s 20 most polluted cities are Indian.
Others think Make in India does not sit easy with basic economic theory. Among them is Raghuram Rajan, who as governor of the Reserve Bank of India is the country’s central bank chief. Hebelieves, in Holcombe’s words, that Indians should “take advantage of others’ mistakes and buy their wares cheaply, while focusing on India’s strengths, such as tech and services.”
Rajan, employing a turn of phrase, calls that concept “Make for India.”
Making for India makes economic sense, but the notion of comparative advantage is a hard sell in a country whose national icon, Mahatma Gandhi, adopted the spinning wheel as a symbol of self-sufficiency.
Modi, apart from the perceived advantaged of self-reliance, has other reasons to promote fast industrialization. He is often described as a nationalist, and as such it would be out of character for him to lend a hand to—or become dependent upon—a China of which he has good reason to be wary.
The prime minister’s plan, even in a world of too many factories, can succeed. A country, for instance, can prosper by building the most efficient plants, driving out old ones elsewhere. There will always be consumers, and consumers will always go for goods that are both inexpensive and well-made.
Yet any Indian leader has to be mindful that economic development must result in job creation, and industrialization can only be a partial answer on that front. Manufacturing, Modi must know, is rapidly becoming automated, even in countries like China that have large pools of relatively inexpensive labor. Robots are invading Chinese factory floors, and the same will inevitably occur in an industrializing India.
The prime minister’s vision of economic development, wisely, is not just based on manufacturing. In addition to Make in India, he launched his “Skill India” and “Digital India” initiatives, both last year.
Modi has often said the 21st century belongs to India, and his country, as he envisions it, will lead in every sector.
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