Biztech Jan 25, 2014
By Hemal Shah
At the World Economic Forum's annual meet in Davos yesterday (23 January), India's Commerce and Industry Minister, Anand Sharma, pitched India's growth story to court potential foreign investments from the likes of Diageo, Heineken and Shell. The timing couldn't have been more inappropriate - when growth has retarded to the notorious "Hindu rate" of 3.5 percent in the last two years. The rupee declined 12 percent against the dollar in December 2013, the finance minister has been fighting to close the current and fiscal deficit gaps of nearly 5 percent, and the central bank has been trying to tame rising inflation.
Sharma loftily described India's aim of raising the share of the manufacturing sector to GDP from 16 percent now to 25 percent and to create 100 million jobs in the next eight years. He referred to the National Manufacturing Policy (NMP) introduced by the UPA in October 2011 as a means of positive signalling to foreign investors. While these goals are laudable, they are woefully unrealistic for at least three important reasons.
First, India is amongst the most difficult places to do business in as per the World Bank's Doing Business index. India fell three places to 134th this year. Access to electricity and enforcing contracts are amongst the major problems. India's manufacturing sector record couldn't be more dismal. In the 1970s, the share of manufacturing to GDP was around 12 percent. Barely rising over the years, this share fell again to 14.6 percent in 2012-2013, the lowest since 1993-1994. According to a CII-BCG study, investment in manufacturing also saw a sharp fall of 72 percent in 2013 compared to 2010. An analysis by Crisil shows that for the NMP to achieve its target of 25 percent of GDP by 2022, the manufacturing sector needs to grow at an annual average of above 16 percent from 2012 to 2022. At the same time, overall GDP growth should be around 11 percent. (It is 3.7 percent this year.) Moreover, only 2.2 million jobs were added between 2005-2010. By these records, the simultaneous target of creating 100 million jobs already seems too far.
Second, about 81 percent of senior management executives surveyed by CII and BCG cited restrictive regulations as the major impediment to manufacturing growth in India. Among these restrictions, India's convoluted concoction of labour laws is almost impossible to comply with. About 50 central laws overlap with 150 state regulations forcing businesses to remain small and operate in the informal sector, which employs about 400 million, or 93 percent, of the Indian workforce.
A firm that employs more than 100 workers needs government permission for layoffs, thereby making it difficult to hire new or seasonal workers or even fire inefficient workers. The NMP policy document does not chart out any serious indication to reform India's restrictive labour laws, except in small pockets of special manufacturing zones, which has managed to stunt the country's manufacturing sector. Labour law reforms have historically been a subject of deadlock for more than six decades. Quite typically, the Planning Commission proposed a major overhaul of labour laws in August 2013 as a response to the deplorable performance of the manufacturing sector, but has seen no follow up.
By any measure, this is not good publicity for India as an attractive FDI destination. The year-long political vacillation on lifting the cap on foreign direct investment was already an embarrassment. To make it worse, in July 2013, Korean steelmaker Posco pulled out of a $5.3 billion investment in Karnataka. Two days later, Luxembourg-based ArcelorMittal announced its withdrawal from a $12 billion steel project in Odisha. In the first seven months of the fiscal year 2013-14, foreign direct investment declined 13 percent from $22 billion in the same period the previous fiscal year. Adding to the mess, the newly elected Delhi Chief Minister, Arvind Kejriwal, just rolled back the decision to allow FDI in multi-brand retail in Delhi.
With the fourth largest delegation after the US, UK and the host country Switzerland, it is absurd to see Sharma selling India's absent growth story and its business friendliness in the Swiss ski resort town. He must understand that he can't keep selling the India story on the achievements of the last decade, the seeds of which were sown in the years before. Lack of political consensus on FDI and worsening business conditions is no reason to sell India at Davos. Without any intention of reforming India's convoluted labour laws, the manufacturing sector is not going to receive any boost in terms of expansion or creation of jobs. By flaunting the unrealistic goals of the NMP abroad, Sharma yet again divulges the government's incompetence in putting the cart before the horse.
Hemal Shah is a researcher for India/South Asia Studies at the American Enterprise Institute in Washington DC. She tweets @hemalshah_7
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