Narendra Modi’s second visit to the US after taking over as the Prime Minister of India has created a lot of buzz around his vision of ‘Make in India’ earlier and ‘Digital India’ now. In a short span of five days, he met not only the US political leadership but also key figures of the American corporate world. The focus, besides asserting India’s relevance and new identity in the changing global political dynamic, was clearly to woo investment into India’s manufacturing sector.

From the perspective of generating gainful employment and a more balanced growth in the economy, there are no two opinions about the importance of the manufacturing sector. However, the share of manufacturing sector in India has remained stagnant at about 15-17% for over three decades, and is much lower than other emerging and developing economies despite the dynamics of globalisation resulting in a dramatic shift of manufacturing to developing countries over the last few decades. As the shift of manufacturing capacities to rapidly developing emerging economies (RDEE) from developed economies is likely to continue, India still has a chance to capture a disproportionate share in the global economic setting. It is estimated that by 2025 RDEE production will account for over 55% of global production compared to 35% presently. With a Chinese slowdown lately, there is no doubt that India, with its huge untapped domestic market and a large pool of cheap labour, can become a thriving manufacturing hub catering to both domestic and global market.

A common element in the approach followed by the economies that have managed to grow their manufacturing sector faster and able to catch up with the earlier industrialised, high-income countries has been

(i) close coordination between the government, policymakers and manufacturers,

(ii) incentivized manufacturing, and

(ii) relieving constraints on manufacturing competitiveness.

However, the exact form of coordination between manufacturers and government/policy makers have differed according to the governance structure of the different countries.

The basic premise on which the industrial or manufacturing policy evolved in India since independence was that private enterprise and manufacturing cannot be allowed to operate without regulation. Regulation is indeed required, but its role is to act as a facilitator not strangulate business processes and activity. Unfortunately, while evolving policies and regulation, this is what happened in India. Since the early 1990s, a number of steps have been taken to improve the policy and regulatory environment for facilitating and promoting manufacturing sector growth in India. However, predominantly the easier ones, which could have been done with a stroke of a pen, have been changed, and the difficult ones which are largely in the domain of state and local governments have yet not seen the light of the day.

The World Bank ranking of 'ease of doing business' puts India at 142nd position out of 189 countries, and China is at the 90th position. A number of parameters on which the ranking of World Bank’s ease of doing business depends on parameters like construction permits, registering property, electricity connection, and so on, which actually fall in the domain of the state governments. Therefore, a lot of the reforms now, that will facilitate manufacturing sector growth in India, have to happen at the state or local level, which in the Indian political set up is a challenging one, but not insurmountable.

The manufacturing sector grew at an average rate of 8% during the first decade of the new millennium. Investment and capacity additions are critical for sustained manufacturing and industrial growth. Investment as measured by the gross capital formation (GCF) at Rs 6,119.28 billion in the manufacturing sector, peaked in 2007-08 and was 38.1% of the total GCF in the economy. As a result, even manufacturing growth peaked at 14.3% in 2006-07, and since then it has been oscillating between 4.3% and 11.3%.

Overall GDP and manufacturing sector GVA grew 7.0% and 7.2% respectively in the first quarter of FY16. Although manufacturing sector growth based on the new methodology looks good, a glance through the output-based index of industrial production (IIP) data does not show such an encouraging picture. IIP overall and manufacturing grew just 3.8% and 3.3% respectively in the first quarter of FY16. A conflicting and below par performance of industrial output growth during the period indicates that industrial and manufacturing recovery is still fragile. Also, the support from external demand to the manufacturing sector is not visible. It may be noted that in value terms nearly 60% of our merchandise exports (including petroleum products 80%) are manufactured products. During the past one year, exports of manufactured products has grown by -0.4%. Given that in 2014 global trade expanded at 0.6%, lower than the global GDP growth rate of 3.4% for the third successive year, external support to the manufacturing sector looks unlikely in the near future. Average annual growth of global trade was 12.5% as against an average annual growth of 4.3% in global GDP during 2000-2008.

Against the aforesaid backdrop, PM Narendra Modi’s effort to hard sell India to both domestic and foreign investors at best could only be seen as the first step. This is not to say that such efforts are not required or do not bear any fruit. Such efforts do create a lot of positive visibility with a number of MOUs and investment commitments, but converting them into reality requires a different kind of effort. These are still not visible on the ground.

Also, a flip flop on the policy front particularly relating to alternate tax demand from the foreign companies has not gone down well with the foreign investors. Despite the Union Budget FY16 exempting foreign investors from paying minimum alternate tax from April 2016, when the income tax department sent notices to about 90 foreign portfolio investors, they sold Indian shares and bonds of around $630 million on May 6, 2015 marking it as biggest single-day sale since January 2014. The tax demand raised by the income tax department on NOKIA’s Chennai plant is still fresh in the mind of the investors, which finally led to the closure of the plant, rendering eight thousand direct employees and many others as jobless.

Not so long ago, a member of “Fragile Five Club” (Turkey, Brazil, India, South Africa and Indonesia), India has indeed come a long way. A country which was reeling under current account and fiscal deficit, falling rupee, and high and stubborn inflation, and appeared to be headed towards a disaster in mid-2013, is currently in a much better shape. Inflation has declined, the rupee is stable, fiscal and current account deficit are no longer a threat, the Indian economy once again appears to be at the doorstep of a new growth run. Early signs of economic recovery are visible but so are the pressure points, some of which are cyclical, but a number of them are structural. Therefore, while the time for pitching for 'Make in India’ and ‘Digital India’ appears to be right, converting it into reality will remain a challenge.

The author is the director, public finance and a principal economist at India Ratings and Research. Views expressed are personal.