ONE of the most worrying numbers in India today – a country full of worrying numbers – is this: a million a month. A million young Indians, according to several estimates, join the workforce every month. To employ so many young people, according to the economists T.S. Papola and P.P. Sahu, the number of jobs available in India must grow at 3 per cent a year. However, in the years since 1991, jobs have actually grown at 1.6 per cent a year – or, in other words, half the young people looking for jobs every month won’t find them.

In the 25 years since economic liberalization, India has for various reasons failed to provide the number and kind of jobs its young people need. The horde of unemployed and underemployed young people – 47 million people under 25 told the 2011 Census they were looking for work and not finding it – have, however, been granted one thing by economic liberalization: expectations. They expect a way out of poverty; they expect comforts their parents could never have dreamed of. There is an unaccustomed urgency to policy discussions in India today, and it comes, partly, from a realization that it would be extremely dangerous to frustrate these expectations.

Prime Minister Narendra Modi seems to understand this. Across the economically depressed North of India, the majority of these young people who voted for him in 2014, have transferred their expectations onto his shoulders. There is every reason to believe that he, too, feels this sense of urgency, and recognizes the political primacy of job creation.

And this is at the root of Modi’s ‘Make in India’ initiative. He first pronounced that phrase from the ramparts of the Red Fort on 15 August 2014; presumably, he made it the centrepiece of his biggest ever speech for this very reason. For the first time in decades, large-scale manufacturing using unskilled labour has become the major focus of the Indian state.

Throughout history, countries have only ever found a single ladder to moderate prosperity, to the creation of a substantial middle class out of a largely unskilled population: large-scale manufacturing. The first industrial nation, Great Britain, set the template; it was followed by others in the West, then the Asian tigers, and now – most swiftly and dramatically – by China. India, by contrast, has de-industrialized since liberalization. For most Indian states, particularly the large northern ones like Uttar Pradesh, the share of manufacturing in output reached a peak in the 1980s or early 1990s, and has declined subsequently.

This ‘services-led’ growth has signally failed in creating the number of jobs India needs – or, for that matter, in creating the kind of jobs India needs. Growing a middle class needs more than economic growth: it needs the provision of economic security. Young workers beginning their career seek to know that there is a career ahead of them, not a single job. This expectation is met much more by a constellation of large factories than by small, atomistic service sector enterprises. Modi, thus, could not have picked a better or more sensible big idea than the revival of Indian manufacturing.

 

In order to understand how Make in India could succeed, it is useful to examine, first, why India has begun to de-industrialize well before global economic history suggests it should. A big reason is the nature of economic liberalization. The factories that dotted India prior to liberalization were, after 1991, exposed for the first time in decades to foreign competition for their products, but many failed to compete on price or quality, and eventually became sick and died. Instead of being lower cost outfits than imports from elsewhere – which should logically have been the case, given that labour surplus India should have been able to keep costs down – they were uncompetitive.

Two of the biggest reasons for this: India’s continuing penchant for archaic, socialist era laws, and its creaking, inadequate infrastructure. India’s infrastructure deficit is, of course, something most would understand at a visceral level. But the average citizen’s frustration with poor public utilities and services pales in comparison to what the average manufacturer must undergo. The absence of steady electricity, for example, means that many factories have to rely on in-house power; this often means diesel generators, and thus many times higher power costs than for international competitors. Poor roads mean late and unreliable delivery of orders, and an inability to plug into the worldwide supply chains that mark the post-2000 global economy. During his election campaign, Modi often talked of Gujarat’s fine roads and its 24x7 power. There are and will be problems, certainly, in replicating that elsewhere in India, but this is understood to be a pre-requisite for Make in India, and expectedly has been made a priority by his government.

On the other big constraint, however, the legal and governance framework, progress has been less assured. True, the Centre has promised to raise India’s worldwide rank in the World Bank’s ‘Doing Business’ report to the top 50 by 2017. This will not be easy; India’s current rank is 142.

India is actually exactly that much of an outlier in terms of the strictness of its regulations. Consider, as an example, labour laws – the reform of which is the holy grail of India focused policy economists.

 

These laws are the subject of almost obsessive interest for very good reason: they are uniquely repressive. The government’s Export-Import Bank studied major world economies a few years ago. It discovered that, first, other than India only Sri Lanka and Pakistan required the state to agree before a company dismissed workers. Second, other than India only Vietnam’s laws called for the agreement of a trade union. Finally, absolutely no country besides India had provisions insisting that companies should be able to show that they had ‘tried all other alternatives’ first.

Such is the case with almost all Indian regulations. The moment that any company begins to employ more than a few workers, it becomes subject to any number of intrusive and constraining laws. This means most companies will want to employ fewer people, and jobs are not created.

Many – indeed, most – of these legislations or rules are well intentioned. Some may even work reasonably well in other countries. But, even those will fail when faced with India’s inadequate governance structure, its paucity of administrative depth and talent, and its inability to quickly resolve disputes.

The services sector – nimble and small, frequently unregulated – can escape the crushing weight of India’s archaic regulations, and has thus grown swiftly. Large manufacturing cannot. If Make in India is to become a reality, therefore, this must be addressed.

 

A successful Make in India campaign would fundamentally transform the Indian economy. It would change from one in which anybody trying to set up a plant is deterred by tonnes of red tape; where even efficient factories could be shut down for hours by unscheduled power cuts; and where, even if something somehow gets made, it might still take a dozen days to travel to where it needs to go. These are, in effect, the root causes of India’s industrial incapability. The transformation Make in India promises will require those root causes to be removed. But, instead of addressing those root causes, Make in India is arguably falling into familiar patterns of error.

First, the government is being tempted by import substitution. As part of Make in India, the prime minister – according to a report in The Indian Express – ordered the secretaries of relevant ministries to scrutinize ‘the imports under their respective jurisdiction with a view to rationalize inessential imports’. The last budget tinkered confusedly with tariffs, trying to create a 21st century electronics sector through 1970s style tariff management.

The import-substituting barriers to trade introduced a decade after Independence in order to protect Indian industry from competition are a big cause of the sluggishness it still suffers from today. Only by being constantly benchmarked by the market to their global peers can Indian industry hope to become more productive – and thus pay its workers more. Nor should Make in India happen at the expense of consumers, which is what will happen if better quality goods are made more expensive through tariff barriers.

 

It is possible, of course, that Make in India import-substituting tariff changes will mean that more Indians buy domestic brand name electronics than those from China or Korea. But, even aside from the pain that may cause consumers, the sector so created will be a strange beast. Global and diffuse supply chains mean that any Indian electronics company may well import many components – creatively priced, in order to maximize tariff and tax benefits – from elsewhere, and essentially just assemble them here. This is not likely to help create jobs on the scale that’s needed.

Second, ‘industrial policy’ – when the state chooses those industries that it suspects will lead to more general growth, and then tries to push their growth through specific measures and tax concessions – seems to have come alive. Sector-specific incentives are the telltale sign of industrial policy. Again, the Make in India effort has focused on specific areas like electronics, the target of the ‘modified special incentive package scheme’, or M-SIPS, which subsidizes electronic companies’ expenditure.

Third, the government is increasing its commitment to special economic zones or SEZs: areas where some national regulations are suspended. India has fiddled around with SEZs for years, and they have largely been little more than legal tax shelters. However, Modi’s suggestion of ‘port-led’ development depends heavily on functional SEZs.

The problems with each of these approaches are manifold. Each requires direct government action; and thus they are simply not going to be implementable on the scale needed to create a million jobs a month. They are vulnerable to capture by special interests. They focus on, or will at best lead to, little beyond government aided domination by Indian companies of the Indian market. Above all, they are incremental; they do not promise the sort of transformation of entrepreneurship and the investment experience that is needed to spread factories and jobs across India.

These approaches replicate errors of the inward looking past. Insisting that ‘export promotion’ is a major objective does not mean that such measures are different in quality from those that promised export growth and ‘hard currency earnings’ in the socialist era. The truth is that India needs to up its share in the world goods trade, not build companies to service Indian consumers. If foreigners buy Indian products, then Indians will too. World demand may not be at its strongest, but India has so small a share of that demand that it can nevertheless grow its merchandise trade handsomely even if the global economy does not recover soon.

Participation in modern trade, in global supply chains, requires several things. It requires flexibility: you need to be able to set up and shut down factories and assembly lines quickly depending on contracts. It requires insulation from political risk and connectivity: the ability to get goods on the high seas as fast as possible, with minimal state intervention. And it requires the ability to import as much as to export: the more integrated you are with the world, the easier it is to become a cog in a far-flung production machine. So far, Make in India has looked at connectivity; de-risking is a distant second, and flexibility and integration have not really been addressed.

 

The biggest successes for Make in India look likely to come in the field of physical infrastructure. Road building had slowed down because the private companies building them were struggling with debt; a few regulatory fixes – including allowing them to exit projects more easily – seem to have eased that problem. The government has spoken of its intention to revive Indian Railways, and has granted the state run enterprise money from the general budget – an unusual occurrence – to allow it to invest more. The extent of private participation in the railways system is also being revised; a policy that permits private freight terminals is expected. Unless derailed by a focus on quixotic, expensive showpiece projects like bullet trains, much might be achieved here.

 

It is worth noting, however, that a shortage of physical infrastructure is not the most immediate or critical constraint. According to a recent speech by the chairman of Visakhapatnam Port, Indian ports are only at 60-70 per cent capacity; for many larger ones, the capacity utilized is in fact more like 40 per cent. The primacy of regulatory reform is intuitively obvious: even good highways can be turned into traffic-snarled messes if any truck crossing a state border is liable to inspection for tax or other reasons.

The other big success will probably be the increasing digitization of cumbersome processes. In a September 2015 World Bank survey of post-Make in India reforms in the states, it was found that most of them had managed to implement the online payment of sales and value added tax. Among the other reforms that had been carried out widely was the mandating of timelines for some permits or registrations – though it remains to be seen if there are loopholes in that process.

The digitization of processes is a vitally important tool. There is a vast difference between putting in a request online, after viewing regulations clearly publicized on a government website, and knowing the timeline of any reply. However, it is not a panacea. In an odd inversion, the front office may be digitized, but the back office may not. In other words, even for processes initiated digitally, the possibility of subsequent physical inspection or re-evaluation offline, might cause them to run into trouble. This is a classic and dangerous short cut: Rather than repairing and replacing outdated laws and rules, the government is trying to streamline the implementation of existing, flawed ones. There is every reason to doubt that this will be enough.

 

The most obvious success of Make in India is that it has forced investors, including foreign investors, to take another hard look at the prospects of manufacturing in India. If nothing else, the fact that the PM has stated that the creation of factory jobs is his central goal represents a vast step forward. Several high profile projects have been announced – though most, like iPhone maker Foxconn’s promises, are far from concrete.

The determination with which the public relations and promotion campaign has been carried out has not quite translated into speed in a structu-ral transformation. Indeed, the strange aspect of Make in India has been how commitment to PR seems to have taken the place of an ideological commitment. Not even his most enthusi-astic backers now think Narendra Modi is committed, Thatcher style, to deregulation and the dismantling of India’s intrusive state.

Thus the most important aspect of Make in India, the actual streamlining of regulations, has received the least attention. This is not to say that it has not been gestured towards. The finance minister, in the 2015 Union Budget, promised a ‘pre-existing regulatory mechanism’ for approvals. The idea is that a firm could be started subject to a pre-declared template, without waiting for specific regulatory approval.

The old problem with self- certification subject to later intervention is however, this, if intervention is possible, it might well occur. And if it does occur, it might well be at the government inspector’s whim. If that happens once an investment is already made, then the capital will be lost in idleness – and the value of possible bribes will increase.

Nevertheless, perhaps the most optimistic development early this year was a promise from the commerce ministry that an ‘expert group’ would be set up with the aim of ‘examining the possibility of replacing multiple prior permissions with pre-existing regulatory mechanism and preparing a draft legislation for this purpose’, according to the official notification in early April. The committee even had a few members from private companies (though only one, from ITC, in the manufacturing sector).

 

One would think more noise would be associated with the drafting of what should be a major new law. Such noise is the byproduct of the widespread consultation with investors and manufacturers that would be needed. Unfortunately, little has been heard. Something so impactful needs more transparency and discussion. And it needs more urgency. The notification said ‘the committee will present its report in 30 days’. Months and months later, there’s no sign of it.

Adding regulatory depth while reducing regulatory imposition – surely the purpose of this committee – should be the square focus of Make in India, because it is the most binding constraint. Previous attempts to industrialize India have foundered because of their dependence on government support, subsidies and action. Aspects of those errors are being repeated. But economic transformation requires ordinary Indians and regular corporations to themselves be allowed to take on the task of large-scale industrialization. For Make in India, the dynamism seen in India’s less regulated services economy must be replicated in its manufacturing.

 

The cost of not making such pervasive changes will be high. The government’s 2015 Economic Survey was surprisingly explicit: ‘Insofar as the government retains influence over shaping the pattern of development, should it try to rehabilitate unskilled manufacturing or should it accept that that is difficult to achieve, and create the groundwork for sustaining the skill-intensive pattern of growth? Attempting the former would be a history defying achievement because there are not many examples of signi-ficant reversals of de-industrializa-tion. A lot would have to change in India: from building the infrastructure and logistics/connectivity that sup-ports un-skill intensive manufacturing to reforming the panoply of laws and regulations – or perhaps addressing corruption in the manner of their enforcement – that may discourage hiring unskilled labour and achieving scale in the formal sector... The cost of [the alternative, and currently preferred] skill intensive model is that one or two generations of those who are currently unskilled will be left behind without the opportunities to advance.’

The ‘leaving behind’ of one or two generations of unskilled Indians is unimaginably dangerous, especially when expectations have been raised so high. It is the underlying promise of Make in India that these hundreds of millions will not in fact be left behind. That promise is still almost as far from being fulfilled as it was on 15 August 2014.