Misguided Priorities

On December 7, 2015, eighteen months after the Narendra Modi government first came to power, Deloitte Touche Tohmatsu's global consumer and industrial products industry group posted a report highlighting its expectation about India capturing the fifth position as the world's most competitive manufacturing nation in 2020. The United States was expected to hold the top spot this year, pushing the current leader China into the second position. How wrong was Deloitte! In five years time, India's economic growth rate has nearly reached its lowest in two decades. Manufacturing fell into a negative growth zone. The Modi government's much-touted 'Make in India' programme was almost a non-starter. There was little systemised investment in infrastructure and job-oriented projects to fuel the demand for manufactured products. Instead, a series of wrong and halfhearted decisions such as sudden demonetisation of large currencies and underprepared experiment with the consumption levy called the goods and services tax (GST). This, alongside massive expenditure on politically-oriented social programmes and growing imports of manufactured junkies adversely affected India's economic growth prospects.

While the country is yet to recover from the shock of banknote demonetisation on November 8, 2016, the GST, launched on the midnight of July 1, 2017, has failed to stop tax leakage or evasion. GST is imposed at every step in the production process but is meant to be refunded to all parties in various stages of production other than the final consumer and as a destination-based tax, it is collected from point of consumption and not point of origin like previous taxes. Shockingly, the national government later admitted that it doesn't have sufficient resources to compensate states for revenue shortfall on account of GST rollout. The centre has written to states citing paucity of revenue for GST compensation in time. In December, GST compensation for August and September were overdue. Punjab and Kerala expressed concern over the delay in GST compensation payment.

Incidentally, demonetisation led to the withdrawal of 86 per cent of all money in circulation at once, disrupting the supply chain and negatively impacting the Indian economy. It may also have something to do with the continued economic slowdown since 2017. Last year, the government admitted for the first time, that demonetisation drastically affected farmers. The Reserve Bank stated that almost all money in circulation made its way back to banks, signalling that the tedious demonetisation exercise did not have much impact on black money. Demonetisation adversely affected small and medium scale business entities and brought real estate business to almost a grinding halt. In consequence, non-banking financial companies (NBFCs) suffered a lot. The money flow was badly disrupted.

Obviously, Deloitte can't be faulted for not being able to guess such surprises as banknote demonetisation followed by the introduction of a half-baked GST system in India. The international consultancy firm did excellent homework to construct the global report on manufacturing, including India's. The prediction was based on an in-depth analysis of survey responses from more than 500 chief executive officers and senior leaders at manufacturing companies around the world. The country index rankings were included in a preview of findings released at the council's annual National Competitiveness Forum in December 2015. Deloitte said- "The 2016 Global Manufacturing Competitiveness Index provides important insights on global innovation trends and highlights the challenges faced by businesses in maintaining or improving their manufacturing competitiveness. India is, however, well-positioned to take advantage of its younger population segment to make it to one of the world's most manufacturing competitive nation by 2020."

The Deloitte report said in addition to the US and China retaining the top two spots, Germany and Japan will remain the third and fourth positions respectively. India, holding 11th position on the list when the Narendra Modi government came to power, was expected to jump up to as high as the fifth place. South Korea, Canada and Singapore are expected to drop one spot each due to India's rise, while Taiwan and the UK are each expected to drop two spots. The surprise downturn of India's economy, especially in the last two years, may be responsible for the growth contraction in the manufacturing sector. The poor performance of the country's automobile manufacturing industry, universally regarded as an engine of growth, is certainly a reason. Unfortunately, this may have more to do with the failure of the government's financial policy and tax system than anything else. In fact, on the positive side, India's manufacturing industry today meets most of the growth conditions such as cost competitiveness, workers' productivity, supplier network, legal system, innovative policy and local market.

Yet, the country's manufacturing sector witnessed negative growth in the second quarter of the current financial year. An important economic backbone, the manufacturing sector grew at minus one per cent in the July-September quarter. The growth rate in the manufacturing sector had slumped to 0.6 per cent in the first quarter of 2019-20 from 3.1 in the fourth quarter of the last financial year. Its decline comes at a time when the Centre's flagship 'Make in India' programme aims to increase the manufacturing sector's share from 17 per cent to 25 per cent by 2022. India's GDP growth rate for the second quarter of this financial year fell to 4.5 per cent, the lowest since the January-March quarter of 2013.

Sadly, ever since the Modi government returned to power with a massive mandate for the second term, it seems to be more concerned about speedily implementing its political manifesto instead of paying enough attention to the economic agenda. In the process, the ruling party is getting increasingly involved in political dogfights with the opposition at the cost of economic progress. The coming annual budget presentation for 2020-21 provides the best opportunity for the government to spell out its economic policy initiatives to take full advantage of the opportunities to grow the manufacturing sector and economy.

Views expressed are strictly personal