By Srinidhi .R

Edited by Anandita Malhotra, Senior Editor, The Indian Economist

India is known for its services exports, but many doubt its ability to export manufactures and that is the perception which our Prime Mister Narendra Modi plans to change. He rolled out a red carpet to industrialists, both domestic and international, inviting them to make India a manufacturing hub that will help boost jobs and growth. The campaign is aimed at making India a manufacturing hub, and the government is withdrawing all the stops for ensuring a smooth path for investors, by setting up a dedicated cell to answer queries of business entities within 72 hours.”We should manufacture goods in such a way that they carry zero defects, so that our exported goods are never returned to us. We should manufacture goods with zero effect that they should not have a negative impact on the environment,” PM Modi said in his speech on Independence Day. All this will auger well for the economy and the markets as it will help in boosting growth, in job creation and revival of investment cycle in Asia’s third largest economy.

Cometh the hour, cometh the man

In his first quarter in office he must tackle the bloated fiscal deficit, which has fuelled high inflation. Book-cooking by the outgoing government means that the true deficit is higher than official forecasts—at perhaps 7-8% of GDP (including the states). Mr. Modi will trim spending on wasteful subsidies of fuel and food and defer the rolling back of welfare schemes passed by the last government in its dying days. A budget will offer a chance to reverse the previous government’s retroactive tax claim on Vodafone, India’s largest foreign investor. Doing so would soothe the nerves of foreign firms. In his first year, Mr. Modi must stabilise India’s rotten banks and tame inflation. Recapitalising state-run lenders will cost up to 5% of the GDP and will involve taking on the bureaucracies that run them and the powerful industrialists who are sitting on bankrupt projects that need to be written off. It will be a test of Mr Modi’s resolve. Another test will be his stance on interest rates. The boss of the central bank, Raghuram Rajan, wants a tough new inflation-targeting regime, he should be backed by the PM. After all, high inflation is partly why Congress lost. A good first year will revive animal spirits. Ajay Piramal, a tycoon with a billion dollars in gross cash, is now looking to invest again. The election result is “a good sign of the maturing of the electorate,” he says. Within two years the economy could be growing at close to its potential rate. Chetan Ahya of Morgan Stanley, a bank, forecasts growth of 6.8% by the quarter ending in March 2016. If Mr. Modi achieves all this, he will have done the easy part.

In the long term he must raise India’s growth rate towards 10% and ensure that expansion starts to generate decent jobs. You do not become a superpower by creating an army of underemployed drivers, idle security guards and ragged peons. India’s median age is 26, and every year for the next decade 10m people will enter the workforce. That requires a new vision for India and deeper reforms. Critics argue that this step Mr. Modi will be unable to take, and that he offers only a limited form of crony capitalism, with chummy deals struck with tycoons. This is unfair: many firms in Gujarat say that the bureaucracy works well, that the courts are fast and that graft is non-existent. The state has some impressive bureaucrats, ministers and institutions. In any case India’s new economic plan will have to be home-grown, because simple prescriptions do not work. Outsiders often argue that all India needs to do is open up its economy and shrink its public sector. But the state is too puny in many ways: it is unable to enforce contracts and cannot afford to spend enough on infrastructure. The big impediment to foreign investment is not legal restrictions (most sectors are already open) but the same nightmarish business conditions that annoy local firms.

But the big question is whether Mr. Modi can make India a global hub for labour-intensive manufacturing. Japan, South Korea and China got richer by employing unskilled farmers in factories. The timing is perfect for India. Labour costs are rising in China; Japanese firms are shifting production from China because of military tensions; and the rupee has fallen, making Indian workers more competitive. Sadly, it is hard to find an Asian boss who is interested. William Fung of Li & Fung, the world’s biggest sourcer of clothes for Western retailers, says activity is shifting to Bangladesh, South-East Asia and Africa. Zhang Ruimin, of Haier, a big manufacturer of household appliances, says he wants to automate his factories in China. Fujio Mitarai, the boss of Canon, plans to tilt production back to Japan and also automate it. When India is mentioned he raises his eyebrows. About half of China’s exports are made by foreign firms. India could try relying on indigenous manufacturers instead. But they usually prefer to use machines, not employ people. They are also subscale. Mahindra & Mahindra, India’s local car champion has a research-and-development budget that is 1% of Volkswagen’s. Some argue that India could rely on a “trickle-down” effect from its sophisticated IT, pharmaceutical and high-tech manufacturing industries. They employ only a few million people but generate exports worth 7% of GDP. As the owners and staff of these firms spend the value added they have earned, they might create jobs. It may be possible on paper, but some are sceptical whether trickle-down can deliver a widespread improvement in living standards quickly. Arvind Panagariya, an economic adviser of the PM argues that such an approach will not transform India. “Manufacturing is of the highest priority…In ten or 15 years’ time India ought to be where China is today.”

Posted by The Indian Economist | For the Curious Mind