Indian Prime Minister Narendra Modi has set his sights on the domestic economy. Yet, his Make in India campaign will only be successful if built on structural reform especially in labour law, power provision and business regulation.
After meeting Prime Minster Shinzo Abe of Japan and President Xi Jinping of China, Prime Minister Modi headed to New York and Washington to address the United Nations General Assembly and meet President Obama. Modi’s main agenda in the United States is to sell India as a manufacturing destination and invite large American businesses, especially in defense and aero space sectors, to establish manufacturing units. In preparation for his visit, Prime Minister Modi launched an official Make in India campaign promising to cut red tape, grant speedy clearances and improve decision making.
There is no doubt that India needs to become a manufacturing hub to reap its demographic dividend and achieve the promise of double-digit economic growth. According to Deutsche Bank, India’s gross investment rate must increase to 38-40 percent from the current 31 percent to generate employment and boost economic growth.
The Confederation of Indian Industry (CII), a leading industry lobby group, in its research suggests that India needs USD 4.7 trillion in investment over the next five years to achieve a consistent annual growth rate of 7 percent. Although recognition among political parties and policy makers that foreign capital is essential to speed up growth has grown, Indian and global business leaders are frustrated about the political will to make tough economic decisions.
Indeed, labor and electricity reforms as well as a drastic improvement in the regulatory framework to improve ease of doing business reforms are in dire need for the Make in India campaign to be successful.
First, labor needs to be freed from the clutches of archaic laws. The decline of leftist parties in the last general election has cleared the path for radical labor reform. India’s IT industry thrives because it is exempted from many of the old labor laws. The Indian government should take a leaf out of the IT industry’s success and overhaul the labor laws to transition India as a global manufacturing hub.
Second, uninterrupted and reliable electricity is a critical bottleneck. Cancellation of coal blocks by the Supreme Court will likely slow down power generation while most of the distributors – State Electricity Boards– which are under the direct control of state governments are in poor financial condition. According to a report last year by rating agency CRISIL, India’s power sector is hampered by debt, accumulated losses and rampant theft. Both generation and distribution of electricity requires radical overhaul to accomplish the task of providing uninterrupted power supply to manufacturers.
And finally, India needs to become more competitive and improve its standing in the ease of doing business index. In the World Bank’s annual “Ease of Doing Business” report a plethora of indicators show the detrimental conditions for starting and doing business in India. The current regulatory framework and non-transparent methods adopted by the government are of grave concern. Trust between businesses and government institutions is broken and swift mending of ways is needed.
Tax authorities slap tax notices arbitrarily and are behind the curve in adapting to new business models. Amazon, the American internet retailing giant, was the victim of such arbitrariness by the Karnataka government tax authorities. The British telecom giant, Vodafone, despite getting a favorable Supreme Court verdict in its tax case, is now fighting a retrospective tax law introduced by the previous government.
For India to fulfill its potential and become a manufacturing powerhouse, slogans and increasing FDI limits will not suffice. Unless structural reforms are enacted, supplemented by decisive action on improving the regulatory environment, it is difficult for global companies to envision India as an investment destination.
