Delivering the Bharat Ram Memorial Lecture at FICCI recently, Reserve Bank of India (RBI) governor Raghuram Rajan said “Make for India” was a better approach than the BJP government’s “Make in India”. According to Rajan, if we follow a “Make for India” policy goods produced would be largely for domestic consumption, while in “Make in India” the focus would be on manufacturing and exports. A “Make in India” policy with focussed on the export-led growth agenda that China followed may not work in India in the current economic scenario that is characterised by a sluggish global economy.
Soon after assuming office, the Narendra Modi government launched its ambitious programme to make India a manufacturing powerhouse and advocated boosting exports and incentivising imports. Rajan is against an export-led strategy that involves subsidising exporters with cheap inputs as well as an undervalued exchange rate. He is also cautioning against picking a particular sector such as manufacturing for encouragement simply because it has worked well for China.Rajan’s statement has triggered a debate on the much hyped “Make in India” campaign of the BJP-led government.
His warning defies time-tested trade theories and the basic tenets of liberalisation and globalisation. The early theory that free trade could be advantageous for countries was based on the concept of absolute advantages in production. Adam Smith wrote in The Wealth of Nations, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” (Book IV, Section ii, 12). If our country can produce some goods at lower cost than a foreign country, and if the foreign country can produce some other goods at a lower cost than we can produce them, then it would be best for us to trade our relatively cheaper goods for their relatively cheaper goods. In this way, both countries may maximise their gain from trade.
Another celebrated economist, David Ricardo, had a less restrictive requirement for trade. Trade can happen if a country has comparative advantage in the production of a good. He defined comparative advantage by comparing productivities across industries and countries. Steven M Suranovic explains Ricardo’s theory: “Suppose Portugal is more productive than England in the production of both cloth and wine. If Portugal is twice as productive in cloth production relative to England but three times as productive in wine, then Portugal’s comparative advantage is in wine, the good in which its productivity advantage is greatest. Similarly, England’s comparative advantage good is cloth, the good in which its productivity disadvantage is least. This implies that to benefit from specialization and free trade, Portugal should specialise and trade the good in which it is ‘best’ at producing, while England should specialize and trade the good in which it is ‘least worse’ at producing.”
Another theory, the Heckscher-Ohlin model, would say that trade would depend on relative factor abundance. Countries with a relative abundance of one factor would be expected to produce goods that require a relatively large amount of that factor in their production. Thus, Australia could focus on production of land-intensive goods like farm products while India could specialise in labour-intensive goods since labour is the most abundant factor in India.
These and other theories highlight the capabilities of international trade as an engine of economic growth, focusing on production targeting the domestic market limit. Reduced appetite for demanding goods and services produced can happen among domestic consumers, too. Sluggishness can feature our domestic economic eco-system, too, especially in these days of macroeconomic instabilities across countries.
Again, the process of globalisation features increasing international specialisation in innovation or production. Firms can serve a market by exporting from their home country, by providing in the foreign market or by exporting from a third location. With the introduction of the Structural Adjustment Programme of the early 1990s, with its focus on liberalisation, privatisation and globalisation (LPG) the possibilities of maximising gains from trade are immense. Export-led growth is also a matter of searching for opportunities and foreign markets. Due to international influences innovation may be induced to leave the country but all-out efforts must be made for production in India. Production must migrate to India and innovation can take place in the developed world. India needs to be integrated in to the global economy and our production should not be just to feed the domestic market.
The “Make in India” programme includes major new initiatives designed to facilitate investment, foster innovation, protect intellectual property, and build best-in-class manufacturing infrastructure. It is a major new national programme designed to transform India into a manufacturing hub. Most importantly, the programme represents an attitudinal shift in how India relates to investors: not as a permit-issuing authority, but as a true business partner. To facilitate “Make in India” dedicated teams will guide and assist first-time investors, from time of arrival and there will be focussed targeting of companies across sectors. Global IT giant Microsoft’s chief executive officer Satya Nadella recently said that his company is looking forward to partner with the Digital India and Make in India programmes of the government.
There are recent reports that the PM may review the “Make in India” campaign in view of concerns raised by Rajan. Abandoning the logic behind “Make in India” and embracing “Make for India” will not go down well with the newly emerging global entrepreneurial class in India and the international business community. Frequent policy flip-flops and uncertainties had been a problem with the previous government. Uncertainties and indecisions in government policies have cost us much, especially in an area like foreign direct investment. Transnational corporations entering India are not just interested in producing for the local Indian market.
If we produce and market quality products matching the best in the world, there will be takers for our products. Our software engineers and health workforce are crucial in forming the international manpower infrastructure. Going by this logic, too, it is time for India to get transformed in to a global manufacturing hub serving the domestic and international markets.
The writer is professor of economics at Christ University, Bengaluru, and can be reached at pmat2012@yahoo.com