Abhijit Mukhopadhyay

Abhijit Mukhopadhyay is an economist. He can be contacted at abhijitmukhopadhyay[at]

When the present government came into power in May 2014, the world economy was experiencing a slowdown. Despite doing well in terms of economy in the aftermath of 2008 crisis Indian economy started going downhill after the year 2011. During the period between 2003 and 2008, Indian economy scripted a superlative performance in terms of GDP and raised the expectations to a higher level. Therefore, an impatient part of the industry and urban population thought that not enough reforms were not being undertaken to take India to the next stage of economic development. That was one of the major reasons behind the spectacular defeat of the previous government.

However, one outstanding fact was overlooked in the denouncement of the earlier regime, laden with biggest corruption charges till date, and in the euphoria of welcoming the new regime, which promised a dream of acche din. For the first time in independent India, manufacturing growth almost collapsed after 2012. Indian economy experienced good and bad days historically, but never before the growth of manufacturing stagnated or went into the negative like it did post-2012. The dominant services sector, as usual, did not allow the public gaze to be fixed upon this outstanding fact.

Not surprisingly then, the new regime’s first grand effort came in the shape of Make in India. The idea was to make India the new manufacturing hub of the world. Many thought this to be an effort to emulate Chinese success, which is true to a certain extent. But, other important aspect of this manufacturing aspiration was to bring in foreign investment, which in turn can take care of the dwindling investment levels in the economy and simultaneously would not create any Indian debt burden in the international market.

 The Prime Minister, Shri Narendra Modi launches the Gold schemes, in New Delhi on November 05, 2015. The Union Minister for Finance, Corporate Affairs and Information & Broadcasting, Shri Arun Jaitley, the Minister of State for Finance, Shri Jayant Sinha, the Minister of State for Commerce & Industry (Independent Charge), Smt. Nirmala Sitharaman and the Secretary, Department of Economic Affairs, Ministry of Finance, Shri Shaktikanta Das are also seen. (photo courtesy: FM Arun Jaitley's Facebook Page )

Prime Minister Narendra Modi launching the Gold schemes, in New Delhi on November 05, 2015. The Union Minister for Finance, Corporate Affairs and Information & Broadcasting, Shri Arun Jaitley, the Minister of State for Finance, Shri Jayant Sinha, the Minister of State for Commerce & Industry (Independent Charge), Smt. Nirmala Sitharaman and the Secretary, Department of Economic Affairs, Ministry of Finance, Shri Shaktikanta Das are also seen. (photo courtesy: FM Arun Jaitley’s Facebook Page )

Moreover, given the fact that services sectors do not create enough jobs for all and sundry though it has a larger contribution to the GDP – a manufacturing growth is seen as the way to create enough jobs. Although the services contributed around 55 per cent to more than 60 per cent of the GDP in the recent past, it always created roughly 20 per cent of total new employments – mostly white collar jobs for the English speaking urban educated population. That is where the importance of manufacturing comes in as manufacturing has the ability to absorb the unskilled and semi-skilled workers.

However, if we do a reality check then clearly Make in India is yet to take off. Firstly, to make India a manufacturing hub more infrastructures are needed. With the failure of the PPP model, most of the infrastructure projects are either incomplete or yet to start. As a result, the government has make promise of an additional Rs. 70,000 crore in the last budget along with the recent infusion of Rs. 20,000 crore in the National infrastructure and Investment Fund. Whether these amounts are sufficient to restart the infrastructure sector or not – remained an unanswered question in 2015.

Secondly, with world demand remaining subdued the FDI route of investment remains as uncertain as it was in 2014. Though in recent times quite a few sectors, including pension and some of the defence sectors, have been opened up for more FDI it is unlikely that this will result into a deluge of foreign investment pouring in as world economy remains sluggish and investors’ outlook and intent to invest remain uncertain.

Thirdly, manufacturing is not solely driven by cheap labour cost alone, even a thriving manufacturing sector entails existence of semi-skilled and skilled labour force. Any cursory look at the Census data will reveal that India fares pathetically in education and training. New government announced a programme called Skill India to address that problem, but what the nation needs now is not any ad hoc programme but wide establishment of institutes and centres for skill building and vocational training. Skill cannot be imparted overnight, and requires some amount of time. Any kind of economic development in any country is always preceded by a solid human capital formation in terms of education, health and other basic social indicators, but in India social sector spending has dwindled in the recent years and the new government is also following the same path – apparently to meet the deficit targets fixed by the FRBM Act. However, without consistent and increasing government expenditure in social sectors skill building or human capital formation is impossible. Historically it never happened in any other country and it will not happen in India either – notwithstanding the grand announcements made by the current government.

Lastly and most importantly, domestic private investment remained indifferent throughout the year 2015 – almost similar to 2014. The story here is also very simple – during the high growth period of 2003 to 2008 (before the crisis hit the economy) industry borrowed heavily from internal and external sources to expand their business. Now while facing a stagnation it is experiencing a prospect of non-payment of their debts and majority of them do not want to take any risk. Since most of the domestic industry borrowings are done from the public sector banks, any default will put a burden on the public exchequer finally. Rising figures of non-performing assets (NPAs) in most of the public sector banks stand testimony to that fact. Domestic industry is demanding implementation of reforms like GST or labour reform – to be assured of the intent of the government. However, here also the fact remains that in the absence of enough domestic demand overall domestic investment will remain sluggish and indifferent even if these reforms are undertaken – unless government directly intervenes in the investment front.

Now, one may ask about possible solutions. While international demand remains sluggish the logical way to find the solution is to look into enhancing domestic demand, which most of the major countries including China are now doing. But, it is quite baffling that Indian economy still is looking at export and FDI routes to revive itself. While in the backdrop of historically lowest levels of international oil and commodity prices current account deficit is at the lowest possible levels with sufficient amounts of foreign exchange reserve, the solution of Indian economic stagnation will not primarily come from external sector or FDI. The fiscal stimulus has to come from the government if it wants to take the economy towards a sustainable inclusive growth path.

In the quest to fund the domestic investment, on the other hand, the intention of creating financial inclusion is also publicised heavily. Through Jan Dhan Yojana more than 19 crore accounts have been opened and according to official announcement Rs. 25,000 crore are deposited in these accounts. However, though this is the first step towards inclusion – financial resources mobilised by opening these new bank accounts can never be the primary funding source of investment growth. Unless greater access to credit, particularly agricultural credit, is provided to the maximum number of people financial inclusion and subsequent domestic demand generation will always be distant reality.

India is also within a phase of demographic transition towards a dominantly young population, and according to a 2014 OECD Economic Survey between 2010 and 2020 approximately 130 million young people are estimated to join the workforce. This implies roughly 13 million people joining the labour force every year. If education, training and finally gainful employment are not provided to this population, this demographic advantage can prove to be a double edged sword for the country. This young population, if unemployed, can create social and political unrest. We can only hope that enough livelihood opportunities are created in the coming years for this gradually younger population towards an inclusive kind of economic growth – instead of announcements and propaganda of new schemes as has been done by the government in 2015.

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