Boosting domestic investment, especially in the MSME sector, will give impetus to the dormant ‘Make in India’ sentiment – counterbalancing India’s glaring unemployment
Make in India, which was poised to be the global hub for manufacturing has lost steam. The PM's silence on the rampart of Red Fort in his Independence Speech on August 15, 2019, endorsed the plight.
What were the reasons which shadowed his flagship scheme? Among several reasons, lacklustre investment was primarily to blame. Domestic investment by private sector witnessed haphazard growth and government investment abated during the Modi-1 period. This was despite the fact that India revamped its standing in the world ranking for 'Ease of Doing Business'. Modi's charisma for investment-friendly leadership was faded by demonetisation which compounded investment risks. In addition, the failures in land and labour reforms, owing to a minority in Rajya Sabha, added fuel to the disdain of investors.
After BJP's thumping victory in the general election in May 2019, the new government made a new venture to adopt different strategies to fructify 'Make in India' in Modi-2. In its "Strategy for New India @75", NITI Aayog – the government Think Tank – decoded new challenges to boost the 'Make in India' sentiment, which was roiled during Modi-1 period.
The report targeted the economy to rise to US$ 4 trillion by 2022-23, from US$ 2.7 trillion in 2017-18. It identified domestic investment as a crucial factor for growth. To reinvigorate domestic investment sentiment, the report suggested a big jump in Gross Fixed Capital Formation (GFCF), which was lying low in Modi-1 period. It recommended that GFCF ratio to GDP should rise from 29 per cent in 2017-18 to 36 per cent in 2022-23. It emphasised that unlike Modi-1 period, government investment should play a crucial role in boosting domestic investment. In 2016-17, government contribution to GFCF was only 4 per cent to GDP. The ratio should increase to 7 per cent of GDP by 2022-23 as per suggestions made by the report.
There were two areas which were identified to have big potential for government expenditures and boosting up the GFCF. These were urban housing and infrastructures.
It was observed that an unbalanced investment was poured in manufacturing in Modi-1 period. Growth in investment was observed to be higher in capital intensive industries, such as automobile and drugs and pharmaceutical. This left MSME (Micro, Small and Medium Enterprises) bereft of investment. As a result, labour-intensive industries reeled under low capital investment, particularly after demonetisation. Empirical studies show that small scale industries were largely banking on black money, which used to flow as cash disbursement. About 85 per cent of this sector was dependent on cash flow. MSME usually function with an unsecured loan from friends and associates. About 40 per cent of this sector was forced to down its shutters after demonetisation.
Another reason for big entrepreneurs to stay away from investing in MSME was that with the advancement of technology and modern industries, entrepreneurs in the organised sectors have chosen to opt for highly capital or skilled-labour intensive technologies in industries. A number of labour-intensive industries shifted to technology-oriented and more mechanised factories, which resulted in shrinkage of employment opportunities. The surge in mobile manufacturing is a case in point.
The report urged rationalisation of direct tax structure such as corporate tax and personal income tax. This has become imperative to resuscitate the investment mood and bring the country at par with South-East Asian countries. It prompted the Finance Ministry to lower the corporate tax to 22 per cent and 15 per cent, without availing any incentive.
In addition, the report emphasised the need for a boost in FDI. Besides opening more areas, thrust should be given to those FDIs which contemplate Buy-Back arrangements. This will have a collateral impact on the country's exports.
While bolstering investment, simultaneous focus should be given to increase demand, the report suggested. The country has been reeling under a slump, despite having big potential, as measured by GDP growth. India has achieved the highest GDP growth in the world. The demonetisation and repealing of black money restricted the demand.
To overcome the deficit in demand, the report suggested that the government will act as a linchpin for reinvigoration. It will increase demand by enhancing the scope of public procurement. To this end, it foresees that new demand will be created by leveraging public procurement for megaprojects, like Bharatmala (the biggest highway project), Sagarmala (the biggest Port project) and Pradhan Mantri Awas Yojana (housing for all).
Besides low domestic investment and demand, the report identified that low adoption of new technology, the slowdown in export-driven industrial growth and policy uncertainty in previous government (before BJP in 2014) hamstrung 'Make in India' during the Modi-1 period.
To shift gears to new business practices, the report suggested the launching of Industry 4 practices. It is characterised by increasing digitisation, interconnection, value chains and business models. It will significantly impact industries like automobile, pharmaceuticals, chemicals and financial services.
Another important motive behind 'Make in India', besides making the country a global hub for manufacturing was to create a strong foothill for permanent job creation. At present, the working population (other than agriculture) is mainly absorbed in self-employed, casual and contract work. About 85 per cent of workers are absorbed in these categories. As a result, the scope for sustainable permanent job opportunities is limited. To this end, only the broad-base manufacturing landscape can provide a large scope for permanent job opportunities. This will also act as a counter to unemployment.
A slump in exports is another area which led to failure in job creation. Export-linked jobs are a major job opportunity in the informal sector. About 30 per cent of India's exports are from labour-intensive industries. Export growth has also slumped due to global volatility. With exports slipping into negative growth during the Modi regime, job opportunities, have overall lost their heyday. IPA
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