16 Oct 15 What should we make in India?
Make in India – the phrase has as many meanings as people using the phrase. The bigger question is what should we make? And equally important – what should we not make in India?
Historically, thanks to socialist ideals and the idea of self sufficiency in everything, we made everything – or everything we could. Relatively closed trade borders and Soviet style thinking meant a higher reliance on “core” industries and commodities. These have been very dear to Indian planners, but are outdated in an era of increasing cross-border trade facilitated by low duties and trade treaties.
If we have to successfully make in India, we need to focus on industries that play to our strengths – not on those where we are at a competitive disadvantage.
Yet, we keep on pushing industries like steel, mining, aluminium, and such like.
These are all commodities, and the only advantage lies in how cheaply you can get it out of the ground. All such projects consume large quantities of land, capital and power; while employing (relatively) few people and damaging the environment. India is densely populated, with intense land pressures. Capital is expensive, while people are plentiful. There is no significant advantage that we have (unless licenses are given away cheap).
Significant political intervention is inherent in such projects, as the large project size (including land deals) and multitude of permissions creates powerful vested interests.
Such type of investments have historically provided low return on capital Further the risk arising from delayed land acquisition, clearances, etc. as well as uncertain commodity prices make these very risky.
Many banks (including most of our private banks) don’t like to fund such projects. But our public sector banks are often arm-twisted into lending to these white elephants. A look at NPAs is illustrative. This is not new – very similar distress was seen in the nineties. We throw more and more money on these companies, and somehow they limp back – but returns on investment are poor.
In many ways the global commodity crisis may be a good thing for India. We might actually realize that huge smoke belching, earth-destroying, Capex-intensive commodities are simply not worth making in India. What do you think?