What to Make of‘Make in India’?

Anna Juhos

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Institute for Foreign Affairs and Trade

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One and a half years after the launch of Prime Minister Narendra Modi’s ‘Make in India’ initiative, the ‘Make in India Week’1 in Mumbai marked another important milestone in the assessment of his government. Within the frameworks of economic growth and human development, this analysis2 aims at contributing to current debates through addressing the following issues. By providing an overview of the Indian growth model, it evaluates the pending Land Bill and the emphasis on manufacturing besides the crucial issue of economic growth’s trickle-down effect on human development. By adding to the ‘geography versus institutions’ debate on the deep determinants of economic growth, the analysis highlights the geographically clustered nature of manufacturing. On the other hand, it also emphasises the pre-requisites for foreign investments, such as the pending Goods and Services Tax (GST) Bill, and some Indian states’ potential in terms of their demographic dividend. Overall, in order to make PM Modi’s initiatives successful in the long run, more state-focused skill and vocational trainings, infrastructure development and balanced subsidy systems are proposed. These, however, can only work if improvement of the legal and political environment, additionally, quick enactment and monitoring of in-depth reforms are guaranteed.

IntroductIon

By increasing the share of manufacturing from the current 16 per cent to 25 per cent over the next decade,3 Modi’s initiative aims at offering a solution for the nearly 12 million people entering India’s job market every year.4 While

the related investment projects and initiatives should be welcomed as tools for providing employment opportunities to many, thorough evaluation of the initiatives highlights the need for further, state-specific improvement.

On the one hand, many argued that luring Foreign Direct Investment (FDI) to India has been successful. However, it mostly favoured the expansion of crony capitalism in particular areas, and especially with the budget cuts for education, only particular segments of the society could benefit from the gains. These processes not only question the national outreach of the ‘Make in India’ programme with FDI still flowing into the most developed Indian states, such as Maharashtra or Gujarat,

1 The ‘Make in India Week’ held in Mumbai, between 13–18 February 2016, aimed at showcasing “the people, policies and partnerships that are driving India’s new manufacturing revolution”. The Netherlands India Chamber of Commerce and Trade, 2016; Make in India Week, 2016.

2 The author is a Fellow at the Institute for Foreign Affairs and Trade, and since August 2014, she has been working as an Advisor to the Deputy Minister at the Ministry of Foreign Affairs and Trade, Hungary. The views expressed are the author’s own.

3 Bloomberg, 2015; BBC, 2014; Bhattacharya, Mukherjee and Bruce, 2014, pp. 3, 6; Planning Commission, Government of India, 2015; India in Business, Ministry of External Affairs, Government of India, 2015 a.

4 Harneit-Sievers and Bertram, 2014; Sinha, 2007.

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but leave behind a more crucial question. The question of public investment into education and the further deterioration of Human Development Indicators (HDI) in the least industrialised parts of India.

In this regard, I argue that the ‘Make in India’ campaign has so far showed considerable improvements in those Indian states which have already been industrial hubs and had developed infrastructure facilities. Initiatives, such as the ‘Vibrant Gujarat’ or the ‘Make in Maharashtra’ campaigns are also indicative of particular manufacturing powerhouses. Furthermore, Bihar’s assembly election results in 20155 and the coming elections in Tamil Nadu or West Bengal (among others) should also invoke a debate on whether the “Bharat Mein Banao, Bharat Ko Banao” (‘Make India by Making in India’)6 is for India or for a rather Saffronized Bharat.7

In spite of supplemental campaigns (‘Digital India’, ‘Skill India’), domestic power shifts and rivalries significantly hinder the ruling Bharatiya Janata Party (BJP)-led coalition’s goal for rapid acceptance of currently pending bills, such as amendments to the Land Acquisition Bill, or the Goods and Services Tax (GST) Bill. The GST Bill would be a significant step easing business and leading to swifter administration and enforcement by proposing a uniform goods and services tax system in India instead of separate, often overlapping state and centre-levied taxes. While the intentions of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) clearly aimed at gaining majority in the upper house of the Indian Parliament, the Rajya Sabha as well, by now it became clear that a loss in Bihar was a clear setback for it, delaying the party’s hopes as far as 2019.8 This should make the ruling NDA more inclined to reconsider its strategy.

Therefore, in order to have a more balanced growth trajectory for all parts of India, not necessarily the strict emulation of the – nevertheless in many aspects successful – Gujarat model, but a more nuanced, comprehensive and quickly enforced development plan is required to match the supply and demand of states. For this purpose, a reconsidered agricultural subsidy, a revised education system, additionally, the prioritisation of sectors with low-skilled workers will be proposed.

the IndIan Growth Model

In spite of its surprisingly low percentage share in the world’s total merchandise (1.66) and services (3.25) exports,9 India has undergone a significant structural change with regard to its Gross Domestic Product (GDP) composition. This has

resulted in the sharp decline of the share of agriculture in the total GDP from 44.8 5 Juhos, 2015.6 Baru, 2015.7 India is referred to in Hindi officially as ’Bharat’, while the term ’Saffronisation’ of India is a

reference to right-wing Hindu nationalism. 8 Politicalbaaba, 2015.9 World Trade Organisation, 2013.

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per cent in 1977–197810 to approximately 16 per cent lately.11 The gradual shift to industrial development in the Nehruvian era was followed by a state- and then a market-led economic model, eventually leading to a slow integration into global value-added chains besides the predominance of the service sector, as the main contributor to the Indian GDP.12 This gradual shift has been, however, characterised by ‘jobless growth’13 with the driving sectors remaining largely unable to absorb the country’s workforce. As a result, more than 50 per cent of the population is still dependent on the remarkably slowly growing agricultural sector,14 which significantly constrains prospects for human development as well.

While the geographically constrained service sector has been labelled as an ‘enclave sector’ without having any trickle-down effect on other sector workers, employment and development, observations here also indicate that industry might be considered in the same way, although not to a same extent. Similarly to Information Technology (IT) centres, such as Pune, Hyderabad and Bangalore, there are particular industrial hubs luring investments and experiencing quick growth, distracting attention away from less developed parts of India.

On the other hand, for the evaluation of Prime Minister Modi’s economic policies, it has been extensively argued that besides successful inflation-, fiscal and trade deficit control, additionally, manufacturing clusters and effective incentive schemes, the numbers speak for themselves.15 According to supporters of such claims, a 7.4 per cent GDP growth and a 2.8 per cent growth rate in industrial production in the financial year (FY) 2014–201516 undeniably prove that “the economy is on the right track”.17 Furthermore, FDI inflows between April–December 2014 reached approximately 24 billion dollars – a rate almost four billion dollars higher than in 10 Mohanty (ed.), 2011, p.195.11 Planning Commission, Government of India, 2015.12 According to Ejaz Ghani and Stephen O’Connell (Ghani and O’Connell, 2014), India’s high service

sector and low manufacturing performance are similar to several Sub-Saharan countries.…the strength of the global growth convergence in services is much stronger than in the manufacturing sector – the convergence line is steeper for services than for manufacturing sector. This would suggest that the growth escalator in services sector can be potentially as powerful, if not more powerful, than in the manufacturing sector for the late comers to development in Africa and other regions. … Indeed, services are now contributing more to growth than the goods sector, in both developed and developing countries.

See also: Union Budget, 2015 a, p. 37.13 Planning Commission of Government of India, 2013; Sinha, 2007.14 Mohanty (ed.), 2011, p. 195.15 Government of India, Ministry of Commerce and Industry, Department of Commerce, 2015;

Prasad, 2015.16 An important remark has to be made with regard to India’s industrial production index here.

Although Anant Vijay Kala argued that the recent growth is remarkable compared to previous year’s 0.6 percent, Raymond Zhong highlighted that India’s recent, significantly upgraded statistical numbers are partially due to a revised methodology and different measurement. This could make certain comparisons with previous years’ numbers problematic, and sudden, significant improvements rather elusive. Zhong, 2015; Birla, 2015; Kala, 2015.

17 Dhoot, 2015; Banerjee, 2015.

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the corresponding period the year before.18 Additionally, FDI equity inflows for the period January–June 2015 stood around 19.4 billion dollars, marking a 30 per cent increase from the corresponding period of FY 2013–2014.19

In line with the supporting arguments and based on the measurement of asset growth, preservation of value and repatriation of capital, the 2015 Baseline Profitability Index (BPI) also underscored developments. “With growth forecasts up, perceptions of corruption down, and investors better protected”, India was ranked first on the list, giving a big boost to the ruling NDA government’s record.20

However, others, such as Kapil Sibal and Sanjaya Baru, have argued that Modi’s achievement in terms of economic management “has been below par” with stalled projects and declining profitability of several companies.21 Such claims are also supported by the World Bank’s ‘ease of doing business’ report, which ranked India 130th out of 189 economies, although highlighting the country’s improvement from previous years.22 Therefore, acceptance of the GST Bill in the Rajya Sabha is a much awaited step in this regard.

As these indicators also show, there are several areas, in which rapid in-depth reforms are required for the ‘Make in India’ campaign to attain an inclusive economic model and have positive trickle-down effects. In these areas, such as health care, education, skill and infrastructure development, a more state-specific approach is required, supplementing current initiatives. I argue that this state-focused approach should also take into account often neglected specificities of the states, including population projections and average age. For a comprehensive review, in the following sections I elaborate on current trends in agriculture and manufacturing, employment, review the pending Land Acquisition Bill, and reflect on disparities between policies, economics, and human development.

18 Union Budget, 2015 b, p. 62.19 Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and

Promotion, 2015 a; Government of India, Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, 2015 b.

20 Altman, 2015; Datawrapper, 2015.Three groups of factors will affect the ultimate success of a foreign investment: how much an asset’s value grows, the preservation of that value while the asset is owned, and the ease of bringing home the proceeds from selling the asset. Each of these groups of factors requires a different kind of assessment. It’s not enough to worry only about rates of return, corruption, political stability, investor protection, or exchange rates alone. The BPI combines these factors into a summary statistic that conveys a country’s basic attractiveness for investment.

21 Baru, 2015; Sibal, 2015. “The stock of stalled projects at the end of December 2014 stood at Rs. 8.8 lakh crore or 7 per cent of GDP.” Union Budget, 2015 c, p. 66.

22 World Bank Group, 2015; World Bank, 2014, p. 4; Birla, 2015.

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GeoGraphy, polIcIes and hubs

There has been a rather extensive debate about the deep determinants of economic growth, the role of geography and institutions in determining growth prospects. On the one hand, Shashanka Bhide and Ric Shand categorised 15

Indian states as forward or backward, and claimed that out of the eight forward states six were coastal states, while the backward ones were predominantly landlocked.23 In contrast, Dani Rodrik, Arvind Subramanian and Francesco Trebbi claimed that institutions are the most important determinants of economic growth, and in case of low economic growth the quality of institutions is to be blamed. Their definition of economic institutions includes both formal and informal rules, norms, such as laws, property rights and trust.24 Furthermore, with strong institutions and well-protected property rights the levels of intra-country migration could be also raised, leading eventually to a more flexible and mobile labour force. 25 People could then use land as collateral for loans, invest without fear, and fully participate in the formal market, turning ‘dead assets’ into ‘active capital’ as Hernando de Soto and Douglas North argued.26

Although the examples of prominent IT centres, such as Bangalore, Pune, or Hyderabad clearly disprove the alleged advantage of coastal states over landlocked ones, coastal states do have a relative advantage in terms of shipping export and access to maritime routes. Besides their developed infrastructure connections and technology, however, I argue that well-protected property rights, quality institutions, the appropriate legal and political framework should be regarded as the most important, business-incentivising factors, also proven by the states’ economic freedom ranking and attractiveness for foreign investments.

23 Shand, Ric and Bhide, Shashanka, 2000, pp. 3747–3757. See also: Sachs, 2003, p. 38–41.24 Rodrik, Subramanian and Trebbi, 2002. See also: Acemoglu, 2003; Todaro and Smith, 2009.25 Intra-country migration is nevertheless a rather weak proposal considering not only badly

protected property rights, but cultural, linguistic differences, and particular interest-, political-, or paramilitary groups guarding the interest of particular states. For the latter we can think of the Shiv Sena’s ‘sons of the soil’ slogan. North, 1990; De Soto, 2001.

26 In this regard, well-protected land assets and property rights should be highlighted in West Bengal, where tenancy has been computerised in contrast to a similar, but failed initiative of Bihar. Ahuja, 2005, p. 158.

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Table 1Characteristics of selected Indian states based on their economic freedom27

Indian state (currently

ruling party)*

Economic freedom (2013)**

Gross State Domestic Product (GSDP)

at current prices, % (latest available)***

Industrial hub(sector, town)****

Gujarat (BJP) Rank: 1Score: 0.65 16.26% (2013–14)

diamonds (Surat);pharmaceuticals

chemical production

Tamil Nadu (AIADMK)

Rank: 2Score: 0.54 14.34% (2014–15)

automotive assembly andauto ancillary manufacturing (Chennai)

textiles (Tirupur)Andhra Pradesh (NDA)

Rank: 3Score: 0.50 12.03% (2014–15) IT (Hyderabad/“Cyderabad”)

Haryana (BJP) Rank: 4Score: 0.49 13.93% (2013–14)

Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO)

automotive assembly andauto ancillary manufacturing (Gurgaon)

Himachal Pradesh (BJP)

Rank: 5Score: 0.47 12.04% (2013–14) pharmaceutical and chemical production

(Baddi)Madhya Pradesh (BJP)

Rank: 6Score: 0.47 16.86% (2014–15)

Rajasthan (BJP)

Rank: 7Score: 0.46 10.09% (2013–14) Japanese manufacturing (Neemrana)

Chhattisgarh (BJP)

Rank: 8Score: 0.44 13.20% (2014–15)

Karnataka (INC)

Rank: 9Score: 0.43 12.26% (2013–14) information technology (IT) (Bangalore)

Kerala (INC) Rank: 10Score: 0.43 13.93% (2013–14)

Maharashtra (NDA)

Rank: 11Score: 0.42 11.52% (2013–14)

financial capital (Mumbai)film industry (“Bollywood”)

auto and auto ancillaries (Chakan; Pune)* Party abbreviations: Bharatiya Janata Party (BJP), Indian National Congress (INC), BJP-

led National Democratic Alliance coalition (NDA), All India Anna Dravida Muneta Kazhagam (AIADMK).

** Debroy, Bhandari and Aiyar, 2014, p.17.*** National Institution for Transforming India Aayog, 2015 a.**** The Economic Times, 2015; Rampal, 2013.

Based on the size of the states’ respective governments, their expenditures, taxes and enterprises, the legal structure and security of property rights, additionally, the regulation of labour and business, in 2013 Gujarat, Tamil Nadu, Andhra Pradesh, Haryana, and Himachal Pradesh were ranked as the top five Indian states with the

27 Eleven states were considered for the analysis. The first ten are the best performing states, and the last ten are the worst performing states as of their economic freedom rank. The Economic Times, 2015 a.

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highest level of economic freedom.28 Foxconn’s 5 billion dollars, 50,000 jobs plan in Maharashtra, General Motors Co.’s announced 1 billion dollars extra investment plan, or Chinese smartphone seller, Xiaomi’s production in Andhra Pradesh29 undeniably prove the success of convincing foreign companies to ‘make it in India’, or rather, to make it in Indian states ranking high on economic freedom.

Table 230

28 Debroy, Bhandari and Aiyar, 2014.29 Choudhury, 2015; McLain, 2015; Pilling, 2015.30 Data is compiled for the table from the following sources: Planning Commission of Government

of India, 2014 a; Ibid., 2014 b; Ibid., 2014 c; Ibid., 2014 d.

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Regarding particular sectors, defence proved to be fruitful – among others with the Indo-Russian agreement that “the Kamov 226 helicopter would be manufactured in India”.31 Furthermore, with the Pune-headquartered Mercedes Benz deciding to manufacture luxury buses in India,32 or BMW, Renault, Ford and Volvo exploring new opportunities to increase localisation and setting up R&D centres, Modi’s aim to increase the share of manufacturing seems to be on track. However, the problem is the same with the automobile industry. Thus, the preferred destinations are predominantly in Maharashtra (Pune, Chakan), Karnataka (Bangalore), or Tamil Nadu (Chennai).33 As the table on the former page shows, this comes amid the interesting observation that the top five states with the highest growth in industry between 2005 and 2014 were Bihar (13.25), Jharkhand (11.06), Gujarat (9.58), Kerala (8.98), and Maharashtra (8.65). In services these were Haryana (11.68), Gujarat (11.48), Bihar (11.17), Tamil Nadu (10.48), and Himachal Pradesh (10).

Table 3Annual growth rate of agriculture and allied activities, industry and services

at constant (2004–2005) prices (latest available data)34

Indian State Agriculture and allied activities Industry Services

Gujarat 28.30 (2013–14) 3.60 (2013–14) 8.50 (2013–14)Tamil Nadu 4.94 (2014–15) 3.64 (2014–15) 9.16 (2014–15)Andhra Pradesh 5.90 (2014–15) 5.25 (2014–15) 8.48 (2014–15)Haryana 3.06 (2013–14) 4.43 (2013–14) 9.39 (2013–14)Himachal Pradesh 13.35 (2013–14) 2.43 (2013–14) 6.84 (2013–14)Madhya Pradesh 18.85 (2014–15) 4.45 (2014–15) 8.13 (2014–15)Rajasthan 5.15 (2013–14) 1.08 (2013–14) 7.18 (2013–14)Chhattisgarh 2.67 (2014–15) 4.72 (2014–15) 8.70 (2014–15)Karnataka 1.25 (2013–14) 2.12 (2013–14) 7.99 (2013–14)Kerala - 1.36 (2013–14) 1.00 (2013–14) 8.95 (2013–14)Maharashtra 3.99 (2013–14) 8.78 (2013–14) 9.27 (2013–14)Uttar Pradesh 4.20 (2014–15) 1.93 (2014–15) 8.26 (2014–15)West Bengal 3.31 (2014–15) 5.05 (2014–15) 8.75 (2014–15)Jharkhand 8.30 (2013–14) 6.02 (2013–14) 11.62 (2013–14)Assam 3.53 (2014–15) 7.37 (2014–15) 7.08 (2014–15)Bihar 4.40 (2014–15) 9.07 (2014–15) 11.18 (2014–15)

If we consider the latest available data, the highest growth rates of industry were exhibited by Bihar, Maharashtra, Assam and Jharkhand. Interestingly, from the states under consideration here, lately it was only Assam, where the growth rate 31 Kumar, 2016.32 Hiremath, 2015.33 Ibid.34 Data based on the following sources: National Institution for Transforming India Aayog, 2015 b;

Ibid., 2015 c; Ibid., 2015 d.

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of industry was higher than that of services, with Bihar and Maharashtra attaining similar, but slightly lower growth rates than that of their service sector.

On the other hand, while the present investments have a clear geographical focus, the government’s plan to develop five industrial corridors could signal determination to extend the benefits. Out of these five corridors, the Delhi–Mumbai Industrial Corridor (DMIC) – connecting Uttar Pradesh, Haryana, Rajasthan, Madhya Pradesh, Gujarat and Maharashtra – contributes 43 per cent to India’s GDP, provides more than half of its industrial exports and production with over 40 per cent of workers and factories across India.35 Besides this, the four other planned economic corridors are “the Bengaluru–Mumbai Economic Corridor (BMEC); the Amritsar–Kolkata Industrial Development Corridor (AKIC); the Chennai–Bengaluru Industrial Corridor (CBIC); and the East Coast Economic Corridor (ECEC) with Chennai–Vizag Industrial Corridor as the first phase of the project (CVIC)”.36

The 100 smart cities projects, approved at the end of August 2015, also indicate an innovative, but potentially lopsided and geographically-focused development plan. By allocating 70.6 billion Rupees (1.2 billion dollars)37 for a period of five years signals a huge endeavour. However, the government should ensure that development of the urban areas does not come at the detriment of the rural sites, and it should also respond to allegations that over environmental issues the growing middle classes’ luxury needs are prioritised. In this regard, however, it can be quite worrying that the above plans and success stories materialise amid suspended projects at less developed parts of India, such as the 12-billion-dollar project in Odisha by the South Korean steel company, Posco.38 Regional, potentially adversely affecting processes and the strength of the Chinese yuan can also influence Modi’s ‘Make in India’.39

In order to clearly outline the prerequisites to attract foreign investors and propel development, besides the economic freedom factor, the employment, education, land nexus has to be examined as well.

the eMployMent, educatIon, and land nexus

According to Rodrik, the sector which serves as the engine of economic transformation has to be characterised by the following attributes. High levels of sectoral and economy-wide productivity, learning and technology transfer

through trade, the potential for expansion to absorb resources and to fulfil export demand, additionally, alignment with the country’s comparative advantage. The latter entails India’s abundant, low-skilled labour force.40

35 Make in India, 2015.36 Ibid.37 Smart Cities Mission. Ministry of Urban Development, Government of India, 2015; India TV

News, 2015; Igloo, 2015.38 First Post, 2015.39 Market Watch, 2016; The Economic Times, 2015 b.40 Union Budget, 2015 b, pp. 103–104; Rodrik, 2013, pp. 165–204.

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At first, industry and manufacturing seemingly meet the above requirements. The ‘Make in India’ initiative even seems to address those who worried that due to the rise of intangible goods of the rather under-taxed service sector, Indian economy will neither be able to cope with job-creation, nor fulfil world market demand similarly to the Chinese or Bangladeshi model.41

The above nonetheless requires commitment from the political and economic circles, several changes to be implemented, and numerous factors to be taken into account, while also keeping in mind that the service sector is perceived to remain the main contributor to the GDP. However, with state-specific development plans, India can embark on a growth model, which is not built on the Asian Tiger’s manufacturing-, or Africa’s service-led growth model, but a combination of the two. For this, the following problems have to be tackled.

probleMs of eMployMent

It has been extensively claimed that one of India’s main assets lies in its demographic dividend. Forecasts show that with the world’s lowest average age of 29 years by 2020 and the proportion of working-age people (15–59 years)

reaching 64 per cent by 2026, India does have the potential to extensively rely on its young population.42 However, following up on Rodrik’s remarks about the transformative sector’s necessarily attribute to absorb labour, India’s industry has to cope with several challenges.

On the one hand, employment elasticity, thus the change in employment in line with economic output, has been close to zero – around 0.22 per cent, not only between 2001 and 2010, but also recently.43 Statistics also show that only 60.5 per cent of working-age population was employed throughout 2013–2014.44 Furthermore, both the Labour Bureau’s and Arvind Panagariya’s report have shown the disparities of the Indian economic model where almost half the population (46.9 per cent) is dependent on the primary sector (agriculture, forestry, and fishing) with a 15 per cent share of the GDP composition.45 With the informal sector flourishing and without any health and security provisions, additionally, the formal sector’s strict regulations favouring small-size firms and current workers, bringing about change is difficult in the manufacturing sector. A positive - but quite slow - trend can be outlined with the declining share of the unorganised labour from 87 to 82.7 per cent between 2004 and 2012.46 Nevertheless, this continuously high proportion

41 Gangopadhyay, 2012.42 As a comparison, China’s estimated average age by 2020 is 37 years, while Western Europe’s

45 years. Union Budget, 2015 d, p. 131; Ernst & Young, 2013.43 Union Budget, 2015 a, p. 11.44 Labour Bureau. Ministry of Labour and Employment, Government of India, Chandigarh, 2015, p. 4.45 Panagariya, 2014.46 Union Budget, 2015 d, p. 136.

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and the meagre three per cent of contract workers undeniably show that productive use of the country’s labour force remains a huge concern.47

What could have made the ‘Make in India’ initiative plausible and timely is Rodrik’s argument about the unconditional convergence across countries and sectors in manufacturing. However, Rodrik has also shown that India is a negative outlier in this regard since its “manufacturing sectors … exhibit labour productivity growth that is 14 per cent less than the average country’s manufacturing sector … [moreover], Indian industries converge at a much slower rate than average (0.005 per cent) – almost not at all”.48 Compared to registered manufacturing, unregistered manufacturing is characterised by very low productivity. Therefore, “it is registered manufacturing, not manufacturing in general, which has the potential for structural transformation”.49

However, even registered manufacturing’s achievements have been meagre. Across the country, registered manufacturing has surpassed 20 per cent as a share of the GDP only in Gujarat, while employment growth in this field was slower than the growth rate of total employment. Furthermore, while the peak year of registered manufacturing was 2011 in Gujarat and Himachal Pradesh, nearly all other major Indian states have shown a declining trend from the 1990s, or even from the 1980s onwards. The last category includes Maharashtra, West Bengal, Kerala, and Assam.50 This confirms claims about India’s “premature de-industrialisation”, or even non-industrialisation.51 Employment patterns, nonetheless, did not follow this trend, and registered manufacturing peaked in 2010 in several states, such as Tamil Nadu, Haryana, Punjab, Himachal Pradesh, Karnataka, Rajasthan, Orissa and Andhra Pradesh. And in spite of some rosy forecasts with regard to employment,52 a more worrying fact is that “no major Indian state has achieved more than 6.2 per cent of employment from registered manufacturing in the last 30 years, and many major states peaked at less than half that”.53

As Table 4 shows, the share of employment in manufacturing between 2004 and 2010 increased the most in Gujarat (6.6), Jharkhand (6.1), Bihar (5) and Assam (5). In Andhra Pradesh (-3.8), Himachal Pradesh (-4.5), Maharashtra (-4.5) and Madhya Pradesh (-7) there was a significant decline in employment between 2004–2010. In spite of this, it was rather the latter category of states which attracted foreign investment recently. The exception and positive example of Gujarat nevertheless implies that the ‘Gujarat model’ really works in this regard. However, it should be still questioned to what extent it can be replicated elsewhere in India.

47 Labour Bureau. Ministry of Labour and Employment, Government of India, Chandigarh, 2015. p. 4.48 Union Budget, 2015 b, p. 106.49 Ibid., p. 105.50 Amirapu and Subramanian, 2015, p. 15; Union Budget, 2015 b, pp. 108–109.51 Amirapu and Subramanian, 2015, p. 16; Union Budget, 2015 b, pp. 107–108.52 The Hindu, 2016 a.53 Union Budget, 2015 b, pp. 107–108.

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Table 454

In line with Rodrik’s claims it should be also highlighted that in order to maintain growth and expansion, and thus the sector’s ability to continuously absorb labour force, ‘Make in India’ mostly needs manufacturing for exports, and not just domestic consumption. In this regard, investments by Foxconn or Xiaomi are greatly beneficial in fulfilling Modi’s goals. On the other hand, an exclusive focus on manufacturing should be also carefully emphasised. Support for all kinds of entrepreneurship should be encouraged considering that increased automatization will to some extent hold up the much needed job-creating endeavour of ‘Make in India’.

54 Data based on: Planning Commission of Government of India, 2014 e.

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Furthermore, it has to be highlighted that construction, a service sub-sector, has been characterised by a more dynamic employment growth.55 As a non-tradable sector, it cannot fully act as a transformational sector in the view of Rodrik’s analysis,56 but it is nevertheless a main contributor to ‘Make in India’ by establishing the required critical physical infrastructure, mostly railways and roads. Therefore, channelling abundant labour force into construction is the first step to develop infrastructure and provide employment in poorer Indian states.

Additionally, besides the rigorous review of India’s labour laws and rights, a rapid skill upgradation for workers is the prerequisite for the success of ‘Make in India, so that they can be employed in the relatively skilled-labour intensive, registered manufacturing.57 In order to maintain high levels of GDP growth – mainly propelled by the service sector – and also improve employment and human development, more balanced incentive and support schemes are required through targeted vocational training programmes and education.

whIther educatIon and labour laws?

In order to tackle problems of unemployment, channelling the country’s abundant unskilled labour force through ‘Make in India’ into manufacturing is a necessary, but insufficient, short-term solution if not accompanied by skill upgradation at

the same time. Therefore, these strategies should be complementary, taking into account Rodrik’s remarks about the transformative sector’s necessary alignment with the country’s comparative advantage, thus, the large unskilled labour force. In order to have more balanced supply and demand, significantly more investment into primary and secondary education, more flexible labour laws, additionally, vocational training programmes for the transferability of skills are proposed.58

The Labour Bureau’s estimates show that only 6.8 per cent of India’s population aged 15 years and above received vocational training, out of which only 2.8 percent was trained formally. In this regard, urban areas fare better with a higher proportion – 2.2 to 4.4 per cent – of people trained formally. Informal training, on the other hand, is slightly more characteristic of rural areas – although to a still very limited extent.59

Current laws favouring small-size companies significantly hinder expansion and development, shown also in the fact that the proportion of small enterprises with less than 10 workers is as high as 76.8 per cent in rural and 65.3 per cent in urban 55 Union Budget, 2015 b, p. 33.56 Union Budget, 2015 b, p. 114.57 Revision of labour laws should include among others the Contract Labour Act, the Industrial

Disputes Act, the Factories Act, and the Apprenticeship Act. Birla, 2015; Union Budget, 2015 b, p. 111.

58 Banerjee, 2015.59 Labour Bureau. Ministry of Labour and Employment, Government of India, Chandigarh, 2015, p. 7.

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areas.60 Furthermore, approximately 93 per cent of the casual workers reported that they do not have any written job contract, while the proportion among waged/salaried employees stands at 66 per cent.61 In the AGEGC62 and non-agricultural sector, the proportion of workers with 1 to 3 years written contract is as low as 3 per cent. This also brings about their non-eligibility for any kind of social security benefit.63 As also shown in the economic freedom indicators, in order to make states more attractive labour laws matter crucially. This brings about the necessity of rapid revision of current laws under state supervision in states ranking at the bottom of the list, thus Bihar, Assam, Jharkhand, West Bengal and Uttar Pradesh.

Furthermore, in spite of the fact that India cannot make use of its demographic dividend without investment into profitable sectors, such as education, indicators show only meagre improvement and weak commitments with India ranking 135th in terms of the Human Development Index (2014).64 In terms of state-wise human development, Kerala, Goa and Himachal Pradesh occupy the first three places, followed by Tamil Nadu (4), Maharashtra (5), and Haryana (7). However, from the list of those states ranked high on economic freedom, Gujarat (10), Karnataka (12), Rajasthan (16), Madhya Pradesh (23), Chhatisgarh (24), and Andhra Pradesh (27) were ranked rather in the middle, or at the end of the HDI list in 2011–2012.65 This indicates that high literacy rates are necessary, but not sufficient prerequisites to attract investment.

The Planning Commission’s sectoral composition of expenditure also reveals that developments are in favour of industry and not education or agriculture.66 Out of the 70.73 per cent allocated for economic services, only 6.86 per cent is for agriculture and allied services, irrigation and flood control, and rural development altogether, compared to 15.89 per cent in the 2013–2014 (revised) budget. Allocations for social services has also declined considerably from 46.49 to 25.93 per cent between 2013 and the last year’s budget, with 8.03 per cent for education, art and culture, 3.22 for health and family welfare, 1.55 for social welfare and nutrition, and 0.32 per cent allocated for labour and labour welfare.67 In this regard, setting up Indian Institutes of Technology (IITs)68 in Jammu and Kashmir, Chhattisgarh, Goa, Andhra Pradesh and Kerala should be welcomed, but should be supplemented by vocational training and investment into primary and secondary education as well.

60 Ibid., p. 9.61 Ibid., p. 9.62 AGEGC stands for: [ag]ricultural sector [e]xcluding only [g]rowing of [c]rops, market gardening,

horticulture and growing of crops combined with farming of animals.63 Labour Bureau. Ministry of Labour and Employment, Government of India, Chandigarh, 2015, p. 9.64 United Nations Development Programme, 2014; United Nations Development Programme,

2015.65 Mukherjee, Chakraborty and Sikdar, 2014, p. 15; Planning Commission of Government of India,

2014 f.66 Planning Commission of Government of India, 2014 g.67 For transport 28.32 percent, for industry and minerals 6.87 percent were allocated. Ibid.68 India in Business. Ministry of External Affairs, Govt. of India, 2015 b.

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Overall, prioritising current consumption over much needed changes can significantly raise the level of social unrest in the long run. Although this has been partially taken into account by the Modi government through the ‘Make in India’ and ‘Skill India’ projects, there is still room for improvement, including the area of agriculture.

whIther aGrIculture?

There were several initiatives by the Indian governments to tackle rural poverty and unemployment. One of these has been the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) from 2006 onwards. It aimed

at providing 100 days paid work annually to one member above 18 years of the poorest households, within 15 days of application and with 33 per cent of female participation. Addressing the problem of delays in payments and the benefits’ actual outreach to the poor,69 successful ‘Digital India’ initiatives of the Modi government in this regard should be highlighted. These include the Jan Dhan (bank accounts), the Jeevan Jyoti Bima (life insurance), the Suraksha Bima (accident insurance), or the Atal Pension Yojana (pension for the unorganised sector).70 In order to make subsidies, benefits, such as pension, and cash transfers transparent, besides the 125.5 million Jan Dhan bank accounts, there are 757 million Aadhaar identity numbers, and approximately 904 million mobile phones.71

The success of such initiatives is, however, often outnumbered by the debates over government concessions and land acquisitions. One example of this is the Tata Nano car project, which was eventually shifted from West Bengal to Gujarat because of the more decisive steps in terms of land acquisition for the company by then-Chief Minister Narendra Modi in 2008.72 Together with the 2005 Special Economic Zones Act which allows the state governments to acquire land at local market price and allocate it to corporations, it has been often reiterated that the state has shifted from being a welfare state to become a facilitator of an inflexible sector interest.73

Making the agricultural sector more efficient could be one solution to the current grievances of farmers.74 However, the agricultural sector’s relative neglect with sustained, disproportionate subsidies seems to continue. Furthermore, the most contested bill during the Parliament’s last sessions was the eventually postponed Land Acquisition Bill.75 Passed in March, 2015, in the lower house of the Parliament,

69 The World Bank, 2006; Census of India, 2011.70 Desouza, 2015.71 Union Budget, 2015 a, pp. 21, 25; Prasad, 2015; Birla, 2015.72 The Economist, 2015.73 Schafer, 1994.74 On farmer suicides see: Mitra and Shroff, 2007, pp. 73–77.75 The Hindu, 2016 b.

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S T U D I E Sthe Lok Sabha, where the ruling BJP-led government has majority, the Bill caused heated debates about property rights, farmers and agriculture, mostly in relation to the following proposed amendments of the 2013 Act.76 The problematic proposals are related to the 2 (2) paragraph’s provisions about the prior consent of at least 80 (i), or 70 (ii) per cent of the affected families with regard to particular land acquisition procedures. The proposed amendment also includes a list of projects, which “shall be exempted from the provisions of” (i) and (ii), thus, the consent clause.77 Furthermore, projects can be also exempt of the provisions of Chapter II and III, thus, ‘Determination of Social Impact and Public Purpose’, additionally, the ‘Special Provision to Safeguard Food Security’. These exemptions and amendments would be applicable to projects under section 10A, thus, those vital to national security or defence; rural infrastructure, including electrification; (affordable) housing for the poor; industrial corridors; and infrastructure projects, including Public–Private Partnerships (PPP).78 Exemption from the Social Impact Assessment (SIA) study is, however, not a new proposal of the NDA government, since it has already been included in paragraph 9 of the 2013 Act, in cases invoking the urgency of land acquisition.79

Other amendments include changing the definition ‘private company’ to ‘private entity’ to encompass a wider understanding of the concept,80 or in Chapter V, section 101, the extension of the time period to five years or longer, as specified in the contract for the return of unutilised land.81 On the positive side, however, the proposed amendment related to Chapter V, Rehabilitation and Resettlement, 31. (2) (h) should be mentioned. Here the amendment proposes the following: “after the words ‘affected families’, the words ‘including compulsory employment to at least one member of such affected family of a farm labourer shall be inserted”.82 Inclusion of such a provision, although subject to rigorous monitoring mechanisms, should be welcomed.

On the other hand, it should be highlighted that with such proposals the dependence of the majority of India’s labour force is at stake. For this, ‘Make in India’ and its accompanying ‘Skill India’ initiative provide the alternative solution with 76 Kundra, 2015.77 Department of Land Resources. Government of India, 2015, as passed by Lok Sabha on 3

March 2015.78 Ibid.; Department of Land Resources. Government of India, 2013 a; Department of Land

Resources. Government of India, 2013 b.79 “9. Where land is proposed to be acquired invoking the urgency provisions under section 40,

the appropriate Government may exempt undertaking of the Social Impact Assessment study.” See: Department of Land Resources. Government of India, 2013 b, p. 9.

80 “4. (yy) ‘private entity’ means any entity other than a Government entity or undertaking and includes a proprietorship, partnership, company, corporation, non-profit organisation or other entity under any law for the time being in force.” See Department of Land Resources. Government of India, 2015.

81 Section 101: Department of Land Resources. Government of India, 2013 b, p. 33; Department of Land Resources. Government of India, 2015.

82 Department of Land Resources. Government of India, 2013 b, p. 18; Department of Land Resources. Government of India, 2015.

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channelling the skilled workforce into manufacturing, and – as suggested earlier – the unskilled into construction in the short run. However, India’s current subsidy system, the ‘Make in India’ initiative, and the Land Acquisition Bill have to be also examined from the perspective of their potential impact on the forthcoming Legislative Assembly elections in 2016 in West Bengal, Tamil Nadu, Kerala, Puducherry, Assam, or – in 2017 – in Uttar Pradesh.83 Overall, the central government should be vary of the ”bad economics is good politics and good economics is bad politics”84 mantra, with inefficient and costly consequences in sight in the long run. While maintaining current high levels of otherwise disproportionate subsidy systems can prove to be a good policy for now, it does not help the realisation of ‘Make in India’ programme’s goals in the long run.

developMent plans

Based on the above overview and in terms of development strategies for Indian states, I argue that the following important conclusions have to be drawn. First, Prime Minister Modi’s ‘Make in India’ is an important initiative, but must

be more profoundly supplemented with the ‘Skill India’ programme. In this regard, however, specificities of the states – not only in economic, but also in political terms – have to be taken into account, if India wants to use its demographic dividend to its full potential.

For this purpose, I argue that the success and continuity of high levels of economic growth should not exclusively depend on one sector, but on specific elements. Therefore, I propose a genuine balance between power, efficiency (‘kshamata’) and ‘swadeshi’ (self-sufficiency), thus production, business and export; the number of skilled workers ‘(jan)sankhya’ (population; number); and ‘sarkar’ (government), thus commitment from the political and technocratic leadership’s side.85 However, adequate emphasis should be laid on attracting the much needed foreign investment as well. Furthermore, a guarantee for rigorous monitoring is also needed, so that public purpose is kept as a priority.

83 Nayyar, 2015.84 Ibid.85 The growing importance of a country’s not only physical, but skilled human capital has also

been emphasised in the book of the economist Sándor Kopátsy. See: Kopátsy, 2012.

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Table 5Characteristics of selected Indian states

Indian stateLiteracy

(%)(2011)*

Overall GDP

Growth** (%)

(latest)

Growth of industry/

manufacturing(%)

average/latest

Legislative Assembly ElectionStable government

(at least two consecutive terms)

Coastal/Land-locked

Gujarat (GJ) 78.0 7.96 9.58 3.60 BJP CTamil Nadu (TN) 80.1 7.29 8.32 3.64 2006: DMK 2011:

AIADMK C

Andhra Pradesh (AP) 67.0 5.84 8.00 5.25

2009:Indian National Congress (INC),2014: TDP-BJP

C

Haryana (HR) 75.6 6.49 6.41 4.43 2009: INC 2014: BJP LHimachal Pradesh (HP) 82.8 6.24 7.75 2.43 2007: BJP 2012: INC L

Madhya Pradesh (MP) 69.3 11.08 8.08 4.45 BJP L

Rajasthan (RJ) 66.1 4.60 6.79 1.08 2008: INC 2013: BJP L

Chhattisgarh (CG) 70.3 6.26 7.71 4.72 BJP L

Karnataka (KA) 75.4 5.40 6.12 2.12 2008: BJP 2013: INC C

Kerala (KL) 94.0 8.24 8.98 1.00

2006: LeftDemocratic Front

(LDF)2011: INC

C

Maharashtra (MH) 82.3 8.71 8.65 8.78 2009: INC 2014: BJP C

Uttar Pradesh (UP) 67.7 5.14 5.66 1.93 2007: BSP 2012: SP L

West Bengal (WB) 76.3 8.62 4.86 5.05

2006: Communist Party of India

(Maoist)2011: Trinamool

Congress

C

Jharkhand (JH) 66.4 8.91 11.06 6.02 BJP L

Assam (AS) 72.2 5.87 2.84 7.37 INC L

Bihar (BR) 61.8 9.92 13.25 9.07 National Democratic Alliance L

* Planning Commission of Government of India, 2014 f.** Planning Commission of Government of India, 2014 h.

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Table 5 aims at highlighting aspects which in my opinion are considered as crucial by potential investors. States are ranked according to their economic freedom, taking the first eleven, and the last five states for review. Thus, besides economic freedom indicators, the states’ literacy, geographic position, the stability of the government, and its economic (overall, industrial and manufacturing) growth rate were considered.

Taking the states of Maharashtra and Andhra Pradesh, which attracted two of the most significant investments with Xiaomi and Foxconn, the example of Maharashtra shows the importance of high literacy rates, GDP, industrial and manufacturing growth, additionally, the state’s strategic, coastal location. With a majority in the Parliament’s lower house, the Lok Sabbha, the BJP’s latest victory in Maharashtra must have also given a boost to business investment – also indicating the importance of trust. Andhra Pradesh, however, provides a surprising example. Interestingly, relatively high GDP and industrial growth, a committed, but relatively new BJP-coalition government, a developed infrastructure and transport system seem to weigh more than the below-average literacy level in the case of Andhra Pradesh. The example of Kerala also shows that other aspects might be considered more important than literacy. Furthermore, the above table shows that a strong, at least 2-term-stable government (Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh) coupled with relatively high levels of manufacturing, industrial, and GDP growth is not enough to attract investment. However, the table confirms claims for Gujarat serving as the role model in this regard.

Based on the above, the following suggestions are proposed. States should first focus on areas, which lie in their domain,86 thus law and order, health, local infrastructure, taxes and land, which will lead to improvement of their economic freedom ranking. This, however, should be supplemented by a revision of labour regulations and more resource allocation to education. For the success of these, age distribution of the Indian states’ population should be also considered. In this regard, states at the bottom of the ‘economic freedom’ list, such as Bihar or Uttar Pradesh can boast of a lower median age than the southern states, thus Kerala, Andhra Pradesh, Karnataka or Tamil Nadu. These latter states’ proportion of people below 30 years is lower than the Indian average, stands at 53 percent, and they are likely to age faster too.87 Looking at the other end of the scale, thus, northern states with higher fertility rates (Bihar, Uttar Pradesh and Rajasthan for example) should concentrate on their demographic dividend and invest money and effort in employing and educating their young population more efficiently. This, however, requires significant resource allocation to education and health care also from their governments’ side.

Furthermore, development of those states should be more significantly supported which currently rank at the bottom of the economic freedom list. If we take only the 20 bigger states, the last five places on the list are occupied by

86 Kausal and Tewari, 2015.87 The Financial Express, 2015.

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Uttar Pradesh, West Bengal, Jharkhand, Assam and Bihar.88 With the exception of Jharkhand, these states have shown considerable improvement, however, in terms of security and property rights, additionally, labour laws and business regulations, they rank between places 13–20.89 This has to be revised and changed.

Another recommendation for states with a predominantly agriculture-based GDP composition is to rationalise their subsidy system and make the agricultural sector more efficient, but also less labour-intensive, directing the workforce towards industry. For unskilled, or low-skilled labour force, construction, for skilled labour manufacturing can provide new employment opportunities, eventually contributing to the particular state’s both economic and human development. Thus, in these states, besides raising the budget levels for education, vocational trainings should be extended as well. This would facilitate improvement of the business environment and eventually attract more job-creating investment. In the more economically developed Indian states, more emphasis should be laid on vocational training and ‘Skill India’, with the aim of improving the trickle-down effect of economic growth and HDI indicators for poorer segments of the society.

Overall, with regard to the ongoing debate whether manufacturing or services should be prioritised, I argued that it is not advisable to significantly prioritise one over the other. Given the low employment elasticity of the service sector, a balance should be reached between industry and services along with a rationalised subsidy system in agriculture and more investment into vocational training and all levels of education.

conclusIon

Based on the above considerations, thus the need for a more rigorous state action, Prime Minister Modi’s initiative to give greater role and a 42 per cent tax allocation to states should be welcomed the most.90 Areas under

state control – thus, law, order, local governance, infrastructure, land and water – seem to be prioritised by investors and therefore require special attention from state governments. Areas under joint control – thus education, labour issues, power and roads – are also very important, but come only second in this regard. Therefore, in order to attract more job-creating investors, the central government’s ‘Make in India’, ‘Digital India’, ‘Skill India’ initiatives require rigorous monitoring and improvement from the side of local and state governments first. These are not only the prerequisites of sustained high levels of economic growth, but also needed for the trickle-down effect and improving HDI indicators.88 Debroy, Bhandari and Aiyar, 2014, p. 17.89 Uttar Pradesh is the exception, ranking 10th on the first list. Furthermore, compared to the all-

India 22 per cent poverty rate, poverty headcount ratio is 36.96 per cent in Jharkhand, 33.74 in Bihar, 31.98 in Assam, 29.43 in Uttar Pradesh, and 19.98 per cent in West Bengal. Ibid., pp. 43, 17, 34, 31, 37.

90 Prasad, 2015.

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Overall, the current analysis aimed at contributing to current debates in several aspects. By highlighting the need for rigorous monitoring and state-specific action, it outlined that the debate should not necessarily evolve around services or manufacturing but a more balanced growth of these two. This is necessary, considering that services will continue to provide the highest contribution to the GDP, but industry being able to absorb labour, and eventually serve as a transformer sector. The analysis also called for a reform of the agricultural sector, the need to channel employment to industry, and a more rationalised subsidy system. By highlighting the importance of state-specific population age structures, it indicated the need for investment into education and health care, additionally, the relative advantage of currently poorer Indian states in terms of young workforce, on which they could better materialise later on if they are willing to invest into skill development. With regard to the geography versus institutions debate, as the economic freedom indicator has also shown, law, property and labour rights are prioritised, while a strong, stable government can be a necessary, but not sufficient prerequisite for attracting investment. Statistics and tables have also highlighted that current investments are not exclusively channelled into BJP-led states. This, while not changing the present clustured nature of industrial hubs, should be welcomed amid political scams and scandals.

Finally, the present analysis has shown that Prime Minister Modi’s ‘Make in India’ and ‘Skill India’ initiatives have the potential for solving several of India’s employment and labour problems. These, however, should be significantly supplemented by rigorous monitoring and human development.

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