India won’t grow without taking on the world

The trouble is that Indian manufacturers appear less and less interested in becoming export powerhouses. In 2012-13, exports approached 20% of sales. Last year, they dipped below 7%, and the proportion will likely be even lower this year.

By Mihir Sharma

Ever since Prime Minister Narendra Modi announced his “Make in India” policies shortly after being elected prime minister in 2014, New Delhi has chased the dream of a prosperous manufacturing sector. There have been some successes — when it comes to making mobile phones, for example.

Yet, to a stunning degree, these efforts have failed. The value added by Indian manufacturing grew 8.1 per cent between 2001 and 2012. In the decade from 2013, for most of which Modi has been in power, the figure slowed to 5.5 per cent. The share of manufacturing in India’s gross domestic product has stagnated around or just over 15 per cent, depending on how you measure it.

The trouble is that Indian manufacturers appear less and less interested in becoming export powerhouses. In 2012-13, exports approached 20 per cent of sales. Last year, they dipped below 7 per cent, and the proportion will likely be even lower this year.

If not for the growth in mobile phone exports, the numbers would be even more dire. And, in fact, the relative success of that sector is a reminder of what’s gone wrong for everyone else.

The crucial player is Apple Inc, which bet on “making in India” for its global supply chain many years ago. It pushed large parts of its supplier ecosystem, including subcontractors such as Foxconn Technology Co, into India as part of a global strategy.

Trade has always been central to the company’s plans. As a consequence, mobile phones are now India’s largest export to the US, up from fourth largest just a year ago.

When manufacturers focus on exports, the entire sector grows, responding to the pull of far larger markets than even India's pool of domestic consumers represents. A giant player such as Apple doesn’t need to be involved. Automotive components are another successful business in India, and the sector is similarly driven by the global focus of multiple large parts-makers.

The rest of the private sector isn’t following suit. And if corporations are all behaving a particular way, it means that they have the wrong incentives.

In this case, the government has focused corporate energies inwards instead of outwards. New Delhi’s priority has been to cut down on imports, not to grow exports, and companies have noticed.

Why wouldn’t they? If a government can be lobbied to erect protectionist walls, that’s always the least-cost path to outsize profits for any domestic producer. It’s certainly easier and safer than searching out new markets.

And, when even companies in a successful export sector such as automotive components are told by senior officials that they should seek to substitute imports, they will recognise that quicker profits might come from doing what the government suggests.

Doing so, however, will be disastrous for India’s growth in the aggregate. The country won’t be able to raise wages and prosperity unless productivity takes off. And productivity won’t grow unless manufacturers are forced to measure themselves against global competition.

What should the government be doing instead? First of all, it needs to resist calls for more tariffs, deeper subsidies and higher trade barriers. While the rich West might be able to afford defensive industrial policies, still-developing India needs to play offense.

Then, authorities must follow up on promises to transform India’s logistics sector. Exporters complain that insurance costs have gone up — driven by instability in the Middle East, among other issues — and ships tend to skip clogged and delay-prone Indian ports. This isn’t just about physical infrastructure; red tape at ports needs to be reduced and governance modernised.

Finally, the state should partner with the private sector and support firms, especially midsized ones, that want to open up new markets. There are years of research showing that Indian companies only take advantage of free-trade agreements, for example, when the government helps explain how to navigate unfamiliar paperwork.

That isn’t how the state operates most of the time. I was at a seminar not long ago with a senior Indian trade bureaucrat. A small manufacturer asked if the government could assist him in finding new markets, especially in African countries with which he was unfamiliar. The official’s reply: “It’s not my job to tell you how to make money.”

Perhaps not. But most countries that grew rich off exports boasted close public-private cooperation.

“Make in India” needs a reset. Modi has spent too long talking up domestic demand and coddling manufacturers. He needs to push them outwards, or watch India’s growth falter.