Reforming India's economy: Calls for manufacturing to go local hailed but obstacles remain

India is rethinking its economy as it exits one of the world's most stringent lockdowns. In the first of a two-part series, The Straits Times India Bureau looks at reforms in the works for firms and farms.

India has identified 12 sectors it can achieve self-reliance in. They include shoes, auto components, textiles, industrial machinery (above) and furniture, sectors which India wants to be global suppliers. But multiple labour laws, weak infrastructur
India has identified 12 sectors it can achieve self-reliance in. They include shoes, auto components, textiles, industrial machinery (above) and furniture, sectors which India wants to be global suppliers. But multiple labour laws, weak infrastructure and bureaucratic delays have made doing business in India hard. PHOTO: AGENCE FRANCE-PRESSE

Prime Minister Narendra Modi has urged Indians to "go vocal for local" and support domestic manufacturing in a bid to ease job losses and growing economic distress triggered by the coronavirus pandemic and near two-month lockdown, which is being eased.

The call, coming as Mr Modi announced an economic stimulus package of 20 trillion rupees (S$375 billion) early this month, has raised concerns that India is moving towards protectionism.

But the push has also found support within India.

Ms Suman Chawla, who runs a bag manufacturing firm in the northern state of Haryana, imports from China fittings for the bags made of Indian leather and canvas. Her firm V&M then exports the bags to the US and Europe.

"Self-reliance I understand but there is a lot to be done for industry to become self reliant. Why can't fittings be manufactured in India?" Ms Chawla said, adding that the domestic market is flooded with cheaper Chinese bags.

"I don't know how they get their costs so low. I personally feel the leather product industry is most suited for India. It can create a lot of jobs. Instead of exporting the best leather... we should add value to the product before sending it out."

Besides the leather sector - whose exports are worth US$5.5 billion to US$6 billion (S$7.8 billion to S$8.5 billion) annually - India has identified 12 sectors it can achieve self-reliance in.

They include shoes, auto components, textiles, industrial machinery and furniture, sectors which India wants to be global suppliers.

For decades after its independence, the country remained closed to globalisation, resulting in an inward-looking complex system of regulations, licences and bureaucratic red tape, critically referred to as "Licence Raj".

In 1991, India started liberalising its economy but remnants of the Licence Raj days have survived.

  • 16%

    Manufacturing's contribution to India's GDP.

    15%

    Population employed in manufacturing.

Multiple labour laws make it difficult for factories to navigate labour issues. Weak infrastructure and bureaucratic delays have made doing business hard even though India moved 14 paces up to 63rd on the World Bank rankings in 2019.

Manufacturers also cite the high cost of capital as a disincentive, with interest rates at 10 per cent to 15 per cent.

"We need to hasten the process of setting up a (factory). The lead time of setting up a factory in India is expected to be three to six months. It has to be cut to 30 to 40 days in terms of land identification, registration and getting it ready," said Mr K. E. Raghunathan, former national president of All India Manufacturers' Organisation.

But he noted the positives, saying local consumption will rise and "government interference in business is going to be lower and manpower is larger and cheaper".

 

Officials maintain India is not moving towards self-isolation.

The manufacturing sector's contribution to gross domestic product has hovered at 14 per cent to 16 per cent for years, with a government-set target of 25 per cent by 2022.

"The biggest bottleneck (to manufacturing) is infrastructure - electricity, roads, trade facilitation, port facilities... They all have to be improved. This kind of infrastructure is needed for both Indian and foreign manufacturers," said Dr Biswajit Dhar, professor at the Centre for Economic Studies and Planning, Jawaharlal Nehru University.

India, he said, needs China's "plug and play model" which, besides providing easy processes to set up factories, integrates manufacturing infrastructure with facilities to allow for the fast movement of goods.

The pandemic has hastened reforms in India, with various states starting to amend labour laws.

But self-reliance is being interpreted differently.

The Bharatiya Mazdoor Sangh, a trade union affiliated to the Rashtriya Swayamsevak Sangh, the ideological backbone of the ruling Bharatiya Janata Party, has taken going local to mean buying only Indian products and countering Chinese imports.

Multinational footwear firm Bata has highlighted on Twitter how it contributed to "India's self-reliance story" through four factories in the country, which means local jobs.

The fashion accessory manufacturer and retailer, incorporated in India in 1931, is based in Switzerland.

Renewed push for domestic defence manufacturing

India, the world's second-largest importer of defence equipment behind Saudi Arabia, is making a renewed effort to push domestic defence manufacturing as part of its self-reliance strategy triggered by the coronavirus pandemic.

Finance Minister Nirmala Sitharaman has announced, as part of the economic stimulus package, that foreign direct investment limit in defence production would be raised from 49 per cent to 74 per cent.

Local production would also be encouraged with the indigenisation of some imported spares to reduce the import bill, she said.

The government has already approved the procurement of 26 defence items from local suppliers, including electric motors and sealing rings, in the Make in India drive, a manufacturing campaign initiated by the government of Prime Minister Narendra Modi in its first term.

Experts said allowing foreign investors to have a majority stake in defence production is an incentive but much depends on whether foreign manufacturers would have the ecosystem to export what they make in India.

"The thing is that the Indian defence industry is at a very nascent stage. This is one incentive for them - the 74 per cent collaboration. But then, they need a market. Nobody sets up a whole big factory just to give us (India) equipment. Equipment needs to be exportable," said lieutenant-general (retired) H. S. Panag.

Over the past few years, the government has been trying to cut its reliance on defence imports.

The country has successfully developed the Tejas, its first light combat aircraft, which was inducted into the Indian Air Force in 2016. The government plans to buy an additional 83 jets after an earlier deal for 40.

A version of this article appeared in the print edition of The Straits Times on May 29, 2020, with the headline 'Calls to go local hailed but obstacles remain '. Subscribe