Context: On June 20, Prime Minister Modi, in a 165-minute virtual interaction with Ministers asked them to put the economy on a growth trajectory. For this purpose, he asked the Ministers for ideas which can transform India into a global manufacturing hub. In the virtual interaction, the discussion was mainly about China and the manufacturing challenges faced by India. Earlier, Prime Minister Modi gave a mantra ‘vocal for local’ during his address to the nation on May 12, 2020. The idea was to promote local brands and goods. He further stated that the brands which are global today were once local. More recently, the clamour has become louder to make India a global manufacturing hub, especially considering the China situation. In the 1980s, China began as a producer of low-end products and in 2010; it became the largest manufacturer in the world, overtaking the US in all the sectors-- drugs to electronics. In 2018, as per UN data, China accounts for 28% of the global manufacturing output.
Manufacturing in India

• Over the past 20 years, Indian manufacturing has grown at nearly the same pace as the overall economy.
• However, its share in the overall economy has stagnated at around 15% and even this modest figure has declined in the last few years due to a slowdown in manufacturing growth. 
• The level of contribution of manufacturing in the Indian economy, as we can see is much lower than our East Asian neighbours and is generally in line with the levels witnessed in post-industrialised economies. 
• India’s share of global merchandise exports has grown from 0.5% to 1.7% in the past 20 years but there is an overall trade deficit in goods. The much vaunted trade surplus in services barely covers one-fifth of India’s trade deficit in goods. This is a balance of trade constraint that the country will have to tackle eventually and again a services-led growth does not seem to be the answer. 

Why Manufacturing Matters: The Multiplier Effect

• Balance of trade aside, there is a more compelling argument for promoting manufacturing growth in India.
• Various studies have shown convincingly that no other sector does more to generate broad-scale economic growth and, ultimately, higher standards of living than manufacturing.
• The magic lies in the linkages that manufacturing has with other economic sectors. The substantial links with dozens of other sectors throughout the economy ensures that manufacturing output stimulates more economic activity across the wider economy than any other sector. This is called as the multiplier effect of manufacturing.
• But this manufacturing cannot be unregistered manufacturing which suffers from low productivity as well as low rate of growth of productivity. Rather, it is registered manufacturing which has the potential to absorb the country’s large pool of unskilled labour and is also more attuned to export-oriented production.
• At the same time the efforts to promote labour-intensive manufacturing should be complemented with rapid and continuous skill upgradation of the workforce because skill-intensive sectors are dynamic sectors and sustaining their dynamism will require that the supply of skills keeps pace with the rising demand for these skills. 

Why India lags in manufacturing
We have underlined the importance of manufacturing but before we proceed any further, we have to understand the key barriers to manufacturing growth in India. The reasons for India’s low level of industrial growth are manifold but we will look at the key barriers that are within the domain of policymakers to address. These are:

• No ‘ease of doing business’
• Inadequate Infrastructure
• Investment Regulations
• Inflexible labour laws
• The Skill Gap

In the following sections, we will see how Make in India initiative seeks to overcome these barriers. But before that, let us first of all understand what Make in India really is. 

• On September 25, 2014, the Indian government announced the ‘Make in India’ initiative to encourage manufacturing in India and galvanize the economy with dedicated investments in manufacturing and services.
• Following this India emerged as the top destination for foreign direct investment, surpassing the U.S. and China. Also, in line with the national programme, the States too launched their own initiatives. However, even after five years, the manufacturing sector, in particular, is on a slippery slope.
• Make in India is designed to facilitate investment, foster innovation, protect intellectual property, and build best-in-class manufacturing infrastructure to make India a global manufacturing hub. To achieve this goal, targets were identified and policies outlined.
• To increase the manufacturing sector’s growth rate to 12-14% per annum in order to increase the sector’s share in the economy.
• To create 100 million additional manufacturing jobs in the economy by 2022.
• To ensure that the manufacturing sector’s contribution to GDP is increased to 25% by 2022 (revised to 2025) from the current 15-16%.?

Market Size

• The Gross Value Added (GVA) at basic current prices from the manufacturing sector in India grew at a CAGR of 5 per cent during FY16 and FY20 as per the annual national income published by Government of India. The sector’s GVA at current prices was estimated at US$ 397.14 billion in FY20PE.
• Business conditions in the Indian manufacturing sector continue to remain positive. The manufacturing component of IIP stood at 129.8 during FY20. Strong growth was recorded in the production of basic metals (10.8 per cent), intermediate goods (8.8 per cent), food products (2.7 per cent) and tobacco products (2.9 per cent). India’s Index of eight core industries stood at 131.9 in FY20.
• Merchandise export decreased 4.78 per cent y-o-y to reach US$ 314.31 billion in FY20.

Investments

• With the help of Make in India drive, India is on a path of becoming the hub for hi-tech manufacturing as global giants such as GE, Siemens, HTC, Toshiba, and Boeing have either set up or are in process of setting up manufacturing plants in India, attracted by India's market of more than a billion consumers and an increasing purchasing power.
• Cumulative Foreign Direct Investment (FDI) in India’s manufacturing sector reached US$ 88.45 billion during April 2000-March 2020.
• India has become one of the most attractive destinations for investment in the manufacturing sector. 

Reason behind the failure on this fund

• Make in India relied too much on foreign capital for investments and global markets for produce. This created an inbuilt uncertainty, as domestic production had to be planned according to the demand and supply conditions elsewhere.
• It brought in too many sectors into its fold, this led to a loss of policy focus. Further, the majority of sectors that make in India focuses, lacks comparative advantages of the domestic economy.
• Policymakers were more concerned about twin deficits: Fiscal Deficit and Current Account Deficit. However, they neglected the third deficit in the economy, i.e Implementation Deficit.
• This has led to a scenario where there is a quantum jump in the ‘ease of doing business’ ranking, but investments are still to arrive.
• Investment crunch partly can be attributed to the decline in the savings rate in the economy and partly due to NPA crisis in the Banking sector.
• Further, an annual growth rate of 12-14% is well beyond the capacity of India's industrial sector.
• Historically India has not achieved this rate of industrial growth and to expect to build capabilities for such a quantum jump is perhaps an enormous overestimation of the implementation capacity of the Indian industries.
• Further, the uncertainties of the global economy and ever-rising trade protectionism, jeopardise the success of Make in India.
• Even though India is among the world’s top FDI destinations, garnering inflows of $49 billion in 2019, However, FDI inflows are more directed towards the capital markets. Manufacturing FDI was only around $8 billion in 2019.

Government Initiatives
The Government of India has taken several initiatives to promote a healthy environment for the growth of manufacturing sector in the country. Some of the notable initiatives and developments are:

• In May 2020, Government increased FDI in Defence manufacturing under the automatic route from 49 per cent to 74 per cent.
• In March 2020, the Union Cabinet approved financial assistance to the Modified Electronics Manufacturing Clusters (EMC2.0) Scheme for development of world class infrastructure along with common facilities and amenities through Electronics Manufacturing Clusters (EMCs).
• As per the Ministry of Statistics and Programme Implementation (MOSPI) report on Payroll Reporting in India, number of new subscribers* under Employees’ Provident Fund Scheme reached 4,01,949 in March 2020.
• Under the Pradhan Mantri Kaushal Kendras, 73 lakh people were trained during 2016-20 while 723 Pradhan Mantri Kaushal Kendras were established till Jan 2020.
• As of February 2020, there were 14,602 Industrial Training Institutes (ITI) present in India. 
• In August 2019, the Government permitted 100 per cent FDI in contract manufacturing through the automatic route.
• Under Pradhan Mantri Kaushal Vikas Yojana (PMKVY) 1.0, 19.85 lakh candidates were trained, out of which 2.62 lakh (13.23 per cent) got placements. Under PMKVY 2.0 (2016-2020), which was launched in October 2016, about 52.12 lakh candidates received training and 12.60 lakh (24.18 per cent) got jobs by June 2019.
• In February 2019, the Union Cabinet passed National Policy on Electronics (NPE), envisaged to create a US$ 400 billion electronics manufacturing industry in the country by 2025. 32 per cent growth rate has been targeted globally in next five years.
• Under the Make in India initiative, Government aims to increase the share of the manufacturing sector to country’s GDP to 25 per cent by 2025.
• Under the Mid-Term Review of Foreign Trade Policy (2015-20), the Government of India increased export incentives available to labour intensive MSME sectors by 2 per cent. In April 2020, Government extended FTP for one more year, up to March 31, 2021.

Road Ahead

• India is an attractive hub for foreign investments in the manufacturing sector. Several mobile phone, luxury and automobile brands, among others, have set up or are looking to establish their manufacturing bases in the country.
• The manufacturing sector of India has the potential to reach US$ 1 trillion by 2025. The implementation of the Goods and Services Tax (GST) will make India a common market with a GDP of US$ 2.5 trillion along with a population of 1.32 billion people, which will be a big draw for investors.
• With impetus on developing industrial corridors and smart cities, the Government aims to ensure holistic development of the nation. The corridors would further assist in integrating, monitoring and developing a conducive environment for the industrial development and will promote advance practices in manufacturing.