Three years after the Narendra Modi government took charge in Delhi, one of its key programmes, the ‘Make in India’ initiative, may be finally bearing fruit. Three different sets of macro-economic data—the number (and value) of industrial projects being set up in the country, foreign direct investment (FDI) and merchandise exports—seem to point to a pick-up in industrial activity in Asia’s third-largest economy.

Of the three, it is the first trend that appears most promising. The value of new industrial units set up in the country rose 29% in calendar year 2016 over the previous year, a Mint analysis of Department of Industrial Policy and Promotion (DIPP) data shows.

It remains to be seen whether the trend is sustained in the coming years. The value of proposed projects in 2016 was significantly higher than that in 2015 but only marginally higher than that in 2014.

There seems to be a sharp regional skew in the pattern of investments. Maharashtra, Karnataka and Madhya Pradesh have witnessed the biggest spurt in new industrial investments over the past two years, with most new industrial units being set up in these states. Maharashtra alone accounted for a third of new industrial units set up since the beginning of 2015. Karnataka and Madhya Pradesh together accounted for a fifth of such units, DIPP data shows.

The trend in FDI has also been encouraging over the past year. Not only did FDI inflows jump 18% to a record level of $46.4 billion in 2016, the proportion of investments directed towards manufacturing also increased. Although services such as telecom and insurance remain the favourite bets of foreign investors, the overall composition of FDI in 2016 turned towards the manufacturing sector, which registered a 38% annual rise in inflows, Citibank economists Samiran Chakraborty and Anurag Jha wrote in a 23 March note. But despite liberalization of FDI norms, sectors such as defence and railways have attracted very little investment, the note pointed out.

The recent recovery in merchandise exports has also added to the optimism around the ‘Make in India’ initiative. Capital goods (engineering goods), textiles and commodities (iron-ore) have been the major contributors to the recent surge in exports.

Of the three trends, the prognosis for exports appears weakest. As the chart below shows, the recent rise in exports from India appears to be part of a global cyclical recovery.

Of the three trends, the prognosis for exports appears weakest. As the chart below shows, the recent rise in exports from India appears to be part of a global cyclical recovery.

The current recovery in Asian exports is largely on the back of cyclical factors and there remain “risks of a more pronounced export slowdown in 2018", a 27 April note by Sonal Varma and other analysts at Nomura said.

There is another problem with India’s manufacturing exports. While manufacturing exports as a share of India’s aggregate output has increased in recent years, the contribution of the manufacturing sector to India’s gross domestic product (GDP), embodied in the sector’s value-addition, has not increased.

This is because most value-addition is taking place offshore, as a previous Plain Facts column pointed out. The integration with global value chains has not helped India move up the value chain but instead seems to have led to a “hollowing out" of India’s manufacturing, as described by Rashmi Banga, an economist with United Nations Centre for Trade and Development, in a 2014 Economic and Political Weekly article.

The twin goals of Indian manufacturing policy over the past few decades have been to help Indian firms move up the value-chain and to create more factory jobs. But the two goals have often been in conflict. The increase in value-addition (and productivity) since liberalization of the Indian economy has precisely been in those sectors which have replaced labour with machines.

The challenge for the ‘Make in India’ initiative is to facilitate the creation of high-productivity jobs in labour-intensive sectors. With China attempting to rebalance its economy and lower its dependence on exports, there is an opportunity for India to step in and carve out a space for manufacturing labour-intensive products for the world.

There are some encouraging signs in this regard, DIPP data shows. Textiles and electrical equipment, two relatively labour-intensive sectors with export potential, are two of the top three gainers in new projects over the past two years.

While India already enjoys a comparative advantage in textile exports, it is a small player in the global electrical equipments market.

Only if India is able to grow such sectors will it be possible to generate new jobs even while raising productivity levels of Indian manufacturing.

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