Wednesday, January 7, 2015

How to 'make-in-India' ?

Wish you a very happy 2015! But hey, why didn’t I write ‘new year’? In US they say ‘happy holidays’ instead of merry Christmas. This is because during this holiday break both Jews and Christians used to celebrate their festivals! Nowadays, we don’t use AD or BC (hindi BC is still ubiquitous :P ). In place of BC i.e Before Christ it is used Before Common Era (BCE) and in place of AD CE (Common Era) is used. Now back to New Year wish, actually according to Georgian calendar New Year is celebrated on 1st Jan but in India you can find a number of occasion when different communities celebrate their ‘new year’ throughout the year (Georgian calendar) like during Deepawali, baisakhi etc. And before you call it ‘’what rubbish’’ kindly check the way some celebrities whished new year. Arre bhai Happy New Year, bhadko mat yaar !

Moving on, lets talk about ‘Make-in-India’. I remember as a child when people used to talk about ‘made in Japan’ tag. It became synonym of good quality and durability. Later on in college when I learnt about ‘kaizen’, six sigma, five whys and many other quality controls I could connect the dot and understand why Japan became such a great manufacturing hub. Lean manufacturing and quality control aspects will be incomplete if we don’t talk about the great works of Sakichi Toyoda. Many quality gurus like Joseph Juran and others worked to make Japan a world leader. (Read the book ‘How Toyota became world #1’)

But hold on for a moment, before we get deep into the pros and cons of manufacturing lets first understand why manufacturing is important. In modern world the economy can be divided into 3 parts vis-à-vis primary sector (eg agriculture, mining etc), secondary sector (manufacturing; automobile, steel plant etc) and tertiary sector (service; banking, hospitality, IT etc ). Now most of the developed economy has a higher share of service sector in its GDP. India too has higher contribution of service sector in its economy but it is not a good symptom for our economy. (I will explain in coming paras). Well, to understand why some nations are rich while others are not is daunting task and it will force me to go to history and move back to modern time (I will suggest you to go through the book ‘WHY NATIONS FAIL’ and watch the documentary ‘GERMS GUNS and STEEL’. The germ theory mentioned in documentary is refuted in the book! ). There are some historical reasons that make the west rich while the east remains poor. Remember the richness of Europe is due to the fact that India during the colonial period was a huge market to the European Nations.

Now back to topic, lets start with what made PM Modi propagate about Make-in-India? Singapore, South Korea and Japan are called the East Asian Miracles. These countries sustained a high growth rate (7% + ) for more than three decades and transformed itself into developed countries. These countries were at par with India in 1947! These countries became the manufacturing hub in 1970s and by 1980s the Asian Dragon (China) joined the race to uplift millions of its people out of poverty. The growth rates of China and India till the 1970s were almost similar. Alas! We were moved by the empty rhetoric of ‘garibi hatao’  while China moved towards real reform. China sincerely utilized its demographic dividend and followed one child policy to drastically control its huge population. Today 45% of China’s GDP is of manufacturing sector and only a meagre 10% contribution is by agriculture. Since we have weak manufacturing sector we have to spend a lot on importing goods. During this time China’s GDP per capita grew from a mere 290 USD in 1980s to more than 8000 USD in 2015. Hum bhi grow kiye hain bhai, but only after 1991 in true sense!

The curious case of India can be solved by uniquely incorporating the tenets of both China and South Korea or Japan. Lets pen down the strength.
1.       Young labour force.
2.       Huge internal market.
3.       Vibrant Democracy.
4.       Over all a non- volatile society.

China too has the first two advantages but due to absence of democracy it can become a volatile society. As for India the demographic dividend will become demographic curse if we don’t change our education system. Our education system produces fewer skilled labours and rather prepares the whole population for white collar job. I have seen people with M.A degree ready to work as labour! A huge rural population can be taught basic skills so that they can fulfil the skill labour demand. In spite of being a labour abundance economy our industries are technology biased. Everybody talks about automation. One reason being the redundant labour law that we have. Remember ISRO is successful in spite of the fact that very few people from IITs or NITs work in it! Well, that opens a new Pandora’s box, so what is the purpose of opening new IITs and NITs ? Well, the answer again lies in ‘laws’. The recruitment laws and the work environment are not flexible. These are some of the reasons why you will find very few people from premium institutes in this kind of reputed institution on the other hand they are in abundance in silicon valley!

But why do we need to trade? Lets say there are only two countries in the world; A and B. Both produce only rice and cloth. ‘A’ produces 5 piece of cloth and 10kg of rice while B produces 10 piece of cloth and 5 kg of rice. Now trade theory suggests that ‘B’ should specialize in cloth making while ‘A’ should specialize in rice cultivation, in this way the world will have a surplus of both rice and cloth (Assume a person is equally capable of producing both rice and cloth). In modern world we need to trade because we have to keep foreign reserve to meet our demands for foreign goods. Say if we want to buy new technology from Europe then they will demand $ they wont accept our rupees! This is the reason why govt wants to increase the taxes on gold because when we buy more gold it reduces our forex reserve.

When Rajan sahab said that make-in-India should be relooked he didn’t mean that this idea should be dropped altogether. He wanted to caution the government on the problems that it will face in its implementation. So to be a low cost manufacturing hub we need following things;

1.       Low input cost i.e land, capital etc
2.       Uninterrupted electricity and proper connectivity of highways.
3.       Entry barrier should be reduced so that even the talented home grown entrepreneurs can participate.
4.       Reform labour law, empower the company HR.
5.       Retrospective taxation should not create tax terrorism. Simply tax laws. Speedy disposal of cases related to tax. Etc

India indeed has some great comparative advantage in engineering field. From automobile to space industry India can be a world leader. India can really do well in textile sector. By opening the defence sector the govt has done an excellent job. This can create a lot of opportunity. We are the world largest defence equipment buyer. Surely defence sector can create huge job opportunities.  We have already shown our prowess in IT sector. Even Bollywood can be used as tool to earn forex. But apart from the export oriented industry, to fulfil the home grown demand we need to promote small and micro industry. This will create a huge job opportunities and will reduce the migration towards big cities.

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