The Davos Special

Can Modi turn Indian manufacturing's whimper turn into a roar?

An on-the-ground account from the World Economic Forum's annual meeting at Davos

It’s a little over 3 PM, but the chill is numbing as I make my way to Café Schneider, the oldest coffee house in Davos — the highest city in Europe located 5,000 feet above sea level, where life goes on as usual at zero and sub-zero degrees. Tucked away in one corner of the promenade, it’s quite easy to miss the café — in existence since 1915 — as your eyes wander towards the picturesque snow-clad mountains that seem to overwhelm this cosy little mountain resort, which also served as the backdrop of Thomas Mann’s masterpiece The Magic Mountain.

But unlike the novel’s protagonist, Hans Castorp, who comes to Davos on a three-week visit to meet his ailing cousin (and ends up staying for seven years), I am among the 500-odd journalists covering the world’s biggest annual congregation of business leaders, politicians and policymakers. Now in its 45th year, the World Economic Forum has been holding its annual jamboree in Davos since 1971, barring in 2002 when the four-day affair was held in New York in a show of solidarity following the 9/11 terror attack.

In Davos, it’s quite common for cafes and shops around the Congress Centre — the venue of the WEF meeting — to rent out a part of their premises to delegations — either from a company or a country — interested in holding business or trade talks on the sidelines of the summit. For some years now, Café Schneider has been the Indian contingent’s favourite.

Previously called the India Adda under the erstwhile UPA’s tenure, the new BJP government chose to rebrand it as the Make in India lounge, to promote PM Narendra Modi’s clarion call from the ramparts of the Red Fort last August, urging MNCs to set up manufacturing units in India. On its part, the India Brand Equity Foundation (IBEF), under the aegis of the commerce ministry, did its job of tom-tomming the Make in India campaign through catchy posters that featured lion silhouettes in vibrant colours representing different sectors. Posters that read ‘Whatever you want to make, make in India’ and ‘From satellites to submarines, from pharma to biotech’ were plastered across the street leading to the café and on local buses plying through the city.

The show was truly on once you stepped into the café. Inside the nicely done-up lounge, heaters were interspersed with plush sofas and chairs. And with the Taj Hotels doubling as the hospitality partner for the event for the second year in a row, it was a gastronomical treat as the hospitality chain’s celebrity chef Hemant Oberoi was stationed at the lounge.

The menu featured regional dishes: rava idli, tari wala murg, dahi bhalla, channa masala, bhel puri, batata vada and sweets such as gulab jamun, barfi and sandesh to name a few. To wash down the food, visitors had the choicest Indian tea, coffee and very special spiced chocolates, thanks to IBEF’s partnerships with the Tea, Coffee and Spices Boards of India.

“With dignitaries and business royalty from across the globe in full attendance, it is the perfect venue to showcase the core of Indian culture — its cuisine — and who better to do it than the pioneers of luxury Indian hospitality,” says Oberoi.

Not surprisingly, the most popular dish among the over 300 guests pouring in each day was the samosa. At the last count, over 2,300 samosas were eaten over the course of four days!

Almost all top business magnates from India were seen at the lounge, happy to bond over a cup of coffee or a snack. The buzz was palpable also because of the presence of two state CMs: Chandrababu Naidu of Andhra Pradesh and Devendra Fadnavis of Maharashtra, union finance minister Arun Jaitley and power minister Piyush Goyal.

Incidentally, there were no Make in India sessions at the WEF, and all the India focus was restricted to three sessions with broad topics: An Insight, An Idea with Arun Jaitley, The BRICS Agenda and India’s Next Decade. But none delved into the various facets of Make in India and what it would take to achieve a higher share of manufacturing in India’s GDP.

So, here I was at the lounge, on the third day of the event, looking for some answers from the policymakers and a chance to get some of India Inc’s honchos talking.

The context

To begin with, with a 15% share of GDP, Indian manufacturing ranks poorly not just in comparison with China (32%) but also with smaller neighbouring countries such as Thailand (34%), the Philippines (31%), Indonesia (24%) and Malaysia (24%). Over the past two decades, Indian manufacturing has managed to create only 53 million jobs against 150 million jobs in the services sector. According to the Indian Council for Research on International Economic Relations, between 2000 and 2012, the manufacturing sector managed to add only 1.4 million jobs each year and that’s dismal compared with the 12 million new jobs that need to be created every year, currently. “The rate of job creation falls severely short of the requirements of productive jobs for the 7-8 million youth expected to enter the job market each year in the next ten years,” a working paper from the institution stated.

Juxtapose this finding against the fact that while China is losing its edge as the most cost-effective manufacturing destination thanks to rising labour costs, the US itself is getting its mojo back. According to a Boston Consulting Group (BCG) study, the US is re-emerging a preferred manufacturing destination due to some key factors. First, wage rates have increased by a third of the average across 25 exporting countries. Second, currencies of these countries have strengthened in recent years against the dollar — making it expensive for the US to buy from them.

More importantly, natural gas costs have doubled for most exporting countries, but the shale gas boom and weakening demand have resulted in a 25% fall in the natural gas price in the US. There are concerns that the rising dollar will dampen export competitiveness, but that has not yet played out. Against this backdrop, the objective of the National Manufacturing Policy, aimed at achieving 25% share of the national output and creating an additional 100 million jobs by 2022, seems a Herculean task. 

But experts believe that all is not lost. According to Janmejaya Sinha, chairman — Asia Pacific, BCG, India’s competitiveness has not eroded as sharply as that of many other countries. “It is a good time for this big push as global manufacturing value chains are under transition with significant changes in competitiveness of different countries.”

That is something that the new government, too, seems cognisant about. As Arun Jaitley mentioned in one of his sessions, “Unfortunately, over the past 10 years, priorities changed. Instead of focusing on ways to achieve a high growth rate we went into this notional debate of what is pro-rich and what is pro-poor. Instead of improving productivity, we focused on distribution.”

To make it attractive for foreign investors to manufacture in India, Modi did outline his plan that entails a $1.2 billion investment to create smart cities, increasing foreign direct investment, facilitating faster execution, launch of a ₹10,000 crore venture fund for small and medium enterprises and steps to enhance job skills. But the critical aspect of the Make in India plan primarily deals with the ease of doing business. Though Modi recently said that he wanted the country to rank among the top 50 in terms of ease of doing business, the World Bank’s ‘Ease of Business’ report places India in 142nd place out of 189 countries, so the PM appears a bit overambitious. That’s possibly one reason why the finance minister is playing it by ear. “Clever and competent people come here to Davos. So, merely glib talk by us is not enough. We are not going to be judged by what assurances we give out here, but on the direction that we have been following over the past few months,” asserts Jaitley.

The government has, however, set the ball rolling and is first looking at putting its own house in order. Leading the change is Amitabh Kant, secretary in the Department of Industrial Policy & Promotion (DIPP). Incidentally, Kant was behind the successful ‘Incredible India’ campaign in 2002, when he was the joint secretary of the ministry of tourism. To begin with, the central government is converging and integrating its various departments. “The integration is based on the use of technology rather than paperwork,” says Kant, who was till recently the CEO and managing director of the Delhi-Mumbai Industrial Corridor Development Corporation.

The e-based platform will not only integrate central departments, the grandiose plan is to link it up with all state government departments. “We would like to integrate all the 10-12 major manufacturing states. And once they are integrated, then other states will follow suit,” points out Kant, as he savours a hot cup of tea. For now, the Centre is focused on converging its corporate affairs, tax, DIPP and labour departments. The idea is to integrate all central departments by May-end. “It is a very complex process. But ease of doing business is key,” adds Kant. 

In line with making India an attractive investment destination, the DIPP has identified eight bottlenecks related to doing business in the country: starting a business, construction permits, electricity connection, registering property, paying taxes, trading across borders, enforcing contracts and resolving insolvency. “Over a period of time, you will have to scrap a number of procedures and processes. For example, we have been told that for trading across borders we need to reduce the number of forms from nine to three. We can see progress being made in labour reforms. The inspectors who visit factories have been ticked off,” says Kant, as he moves for a refill.

Though foreign direct investment into India increased by 26% to an estimated $35 billion last year, a majority of the flows found its way into the services sector comprising electricity, gas, water, waste management, technology — and not hardcore manufacturing. Ask Kant on what FDI numbers is he looking at for the manufacturing sector in the years to come, and his response is cryptic: “Correct the policy framework and investments will come in automatically. Predictability and stability are important. Where else in the world do you have demand? India has a supply-side problem.”

Agrees Sinha of BCG. “If we can improve the ease of doing business so that the cost of doing business is reduced, India’s competitiveness will improve significantly, irrespective of what happens elsewhere.”

The other big sore point for investors in recent years has been taxation, for instance, the $490 million tax dispute involving Vodafone over the contentious transfer pricing violation. The Bombay High Court recently passed a judgement in favour of the telecom major, stating that share issuance by an Indian subsidiary to a foreign holding company to raise funds did not amount to a rise in income, and hence, transfer pricing regulations cannot be applied to the case. 

The new government chose not to file an appeal in the case that was initiated during the previous UPA regime. The reason the Modi government abstained was evident, when Jaitley remarked: “As far as taxation is concerned, it has to be non-adversarial. Retrospective legislation won’t work. In fact, controversial cases have not yielded us any revenue… we are left with a losing battle. So, the brief to the tax department is clear: those who are supposed to pay taxes are supposed to pay it and those who are not, don’t have to.”

This new approach will be a welcome change for companies. But the impact of the new regime’s stance on the Indian economy will take its time coming, a view echoed by India Inc as well. A recent BCG-CII survey showed that 84% CEOs feel that ‘significant’ change would be required in both policy conceptualisation and implementation to support manufacturing. A lot would also depend on how the Centre is effectively able to work with the states. Luckily for the Modi government, the BJP has come to power in a lot of progressive states, and where it hasn’t, it has the support of allies who have taken the onus on themselves to push the growth juggernaut. That explains why Naidu — dressed in casuals — and Fadnavis — in a formal suit — were more than happy talking business.

State of the art

With eight states under its direct control and two with its allies, the BJP has its clout spread across northern, central and western India. But among the eight states, Maharashtra enjoys a higher weightage as it houses the financial nerve centre of the country.

At 44, Fadnavis is the second-youngest chief minister of Maharashtra after Sharad Pawar, chief of the Nationalist Congress Party, who became the CM at 38 in 1978. After taking charge, Fadnavis is looking to catch up on the lost decade that saw the state losing out on brick-and-mortar investments to neighbouring Gujarat and progressive southern states such as Tamil Nadu.

It’s not without reason that Maharashtra is important from a national perspective. It is the single-largest contributor to the national economy with a 15% share of the GDP, 17% of the country’s industrial output and 16% of the country’s service-sector output. The state, however, has not had an impressive track record with respect to new projects in recent years.

Between 1991 and 2013, over 7,800 projects worth over ₹182,000 crore were commissioned, but that number pales when seen in the context of the over-18,000 proposals — totalling a little over ₹1,000,000 crore — over the same period. With more than 58% investments failing to fructify, the CM has a huge task at hand to convince investors that the state means business.

“We are working on the entire permission regime and cutting down on the number of approvals required. We are putting several permissions on the automated route so that if in two or three days you don’t get any intimation [from the department concerned] it is deemed permitted,” says a soft-spoken Fadnavis, who was hand-picked by Modi to head the state. The CM, who held over 30 bilateral meetings on the sidelines of the forum, wants to reduce the number of permissions required to start a business in the state from 76 to 25.

The recent move by the state to scrap the River Regulation Zone policy is seen as a strong indication that the new regime is serious. In fact, projects worth ₹7,000 crore were stuck because of the RRZ policy. “In classic cases, a zero-discharge industry fails to get permission just because it falls 20 metres in the RRZ. So, we have scrapped it and adopted the national policy, which is litigatory. A policy cannot just be regulatory. It has to be litigatory as well,” points out Fadnavis. 

A beneficiary of that has been MNC Schindler, whose lift-manufacturing unit in the state was stuck due to the RRZ policy. “It was a zero-discharge company and its plant, because it fell in 20 metres’ radius, was not getting permission. Their entire investment of over ₹300 crore was stuck for the past one and a half years and that’s not a pretty situation to be in,” explains Fadnavis. Similarly, the CM is also cleaning up some ‘absurdities’ in the environmental act.

“Just to give you an example, the Air India folks wanted to put a new logo atop their sea-facing HQ at Nariman Point [the central business district in Mumbai], but they did not get an environmental clearance for the past one and a half years. This is ridiculous,” quips Fadnavis, who has graduated in law. “In cases of environmental clearance, we are not diluting the process but are cutting down the time taken by it,” Fadnavis is quick to add.

On the labour front, too, after the Rajasthan government, Maharashtra wants to revamp its labour act. Rajasthan was the first state in the country to amend its labour laws. For example, worker unions would now need support from 30% of a factory’s staff before they can represent them against the earlier 15%, while companies with 300 employees will no longer need government approval to shut shop, against the earlier 100. “The present law has put an artificial limit which has led to an increase in contract labour only. Once the law is changed, more labourers will be regularised in the industry, leading to enhanced job security,” justifies Fadnavis.

With the state machinery making its intent clear, MNCs are getting approvals fast and thick. IT major Cognizant got an approval for additional land in Pune, where it has announced the creation of 20,000 jobs. Investment banking major Morgan Stanley has indicated that its expansion plans will create 15,000 jobs. Incidentally, just before my meeting with Fadnavis, John Rice, CEO and president, global growth & operations, GE, spent some time with him, and what transpired was elucidated by the CM: “GE is keen on its second phase of expansion in the state, involving an outlay of ₹3,000 crore.”

What was notable at the lounge was the camaraderie between the two CMs. If one CM was talking business with investors in a small makeshift cabin, the other had no qualms sitting out engaging others. But unlike Naidu, who had already made headlines in local newspapers back home on the very first day of the annual sessions for getting commitments from Pepsico, Wal-Mart and Wipro, Fadnavis was averse to giving any number to the investment commitments that the state received. “I don’t want to end up on a sticky wicket after announcing commitments that don’t end up fructifying,” chuckles Fadnavis.

Back in the helm with a much smaller state after Telangana was carved out, Naidu is on an overdrive to woo investors back to Andhra Pradesh — a state that kept him out of power for the past 10 years. “The sky is the limit when it comes for opportunities for investors in the state,” mentions Naidu. The CM is looking at investments in technology, tourism, infrastructure and oil refineries.

“Right now, I am just spreading out on the table what I have to offer, investors have to take their pick,” explains Naidu. For starters, Naidu has got some positive feedback from MNCs as well as from domestic IT and auto-component companies. While GE held talks with Fadnavis, it also interacted with Naidu on exploring new investments. But Naidu is not perturbed about losing out on the investment to other states. “GE is such a big player that every state has an opportunity to work with them.” With the Centre and state looking to lay out the red carpet for business, is the business community as excited?

Desi tadka

India had the second-largest contingent after the US at Davos and expectedly, there was an air of optimism. This is notwithstanding the ground reality back home: the private investment cycle is yet to take off and credit growth continues to be dismal. But unlike the mood last year, corporate chieftains are keeping the faith. Rahul Bajaj, the 76-year-old Bajaj group chairman and a regular at Davos since 1979, was at his candid best: “India has always been a good place for manufacturing. Even during the early ’90s, when we were branded as the ‘Bombay Club’, we were only seeking a level playing field for the domestic industry.”

Referring to the rising trend of low-cost countries grabbing market share from Chinese manufacturers, Bajaj points out: “Bangladesh and Vietnam are getting business, why not India? We are already seeing steps being taken… but you cannot expect him [Modi] to spend all his political capital in the first year. But it’s imperative that we move up the value chain.”

It’s a view that resonates with Baba Kalyani, founder of the ₹12,000 crore Kalyani Group with over 7,000 employees. “There is a lot of basic manufacturing that India can do with tremendously high value addition. Be it products for engineering, power generation, railways, ships, marine or defence.” In fact, the group is aligning its business to take advantage of the Make in India initiative. To begin with, the group is looking at import substitution of over $30 billion worth of iron and steel products procured by the defence, energy, automotive, construction and mining equipment industries.

Given that forgings would be the base for the new products, the group sees it as a stepping stone towards high value addition — with sophisticated technology. “I think in today’s environment, you will almost need computer scientists on the shop floor. Manufacturing will no longer be about automation alone, but an amalgamation of the internet, information, as well as sensor technologies.”

This is the future that the IT industry, too, is excited about. Vishal Sikka, who is on his maiden visit to Davos after taking charge at Infosys, believes the country should not do manufacturing the way it used to be done or has been done. “We need to bring in our competency, which is software, to help redefine manufacturing. If we can do Make in India with the power of software and innovate, then we can make a huge difference here,” points out the 47-year old, whose previous stint was with SAP as its chief technology officer.

Habil Khorakiwala, the 72-year-old founder of Wockhardt, counted among India’s top 10 pharmaceutical companies, believes the country need not play on the cost advantage and should instead focus on innovation. “There will always be a country cheaper than us as we go on advancing. Therefore, we need to compete through innovation. Unlike in the West, Indian industries do not have a legacy. So, we can leapfrog ahead in terms of technology and our cost structure, too, will play its part.” 

What the pharma industry does expect from the new regime is a more conducive environment for conducting clinical trials and R&D. “In our industry, research is a challenge and the government must look to systematically reward innovation in R&D through some kind of structure,” opines Khorakiwala, who is looking to double his company’s R&D budget this fiscal to around ₹1,000 crore.

Just like the pharma industry, the automobile industry, too, is on an investing spree. Maruti Suzuki, the country’s largest passenger-car maker, is investing ₹3,000 crore to set up the first of its three plants in Gujarat to manufacture 250,000 units annually. Given that the sector accounts for 7% of the GDP and employs close to 20 million people, fresh investments will be a welcome step. While there is a general sense of optimism around the Make in India bandwagon, a quick reality check seems warranted.

Past imperfect, future tense

All of 63, Chalapati Rao has spent a good part of his career studying corporate governance at the Institute for Studies in Industrial Development since the ’80s. In recent years, he shifted his emphasis to FDI-related issues. As part of a two-year research project, Rao and team presented a working report on the impact of FDI on manufacturing.

The report is damning and dismisses any notions that FDI has helped the country boost its manufacturing capacity — the primary reason the country liberalised rules around foreign investment in 1991. “It was projected that a freer regime will help Indian entrepreneurs get the best technologies and a competitive environment unleashed by removal of the licensing system, and entry of new foreign investors will force Indian enterprises to invest more in R&D and pave the way for India’s technological advancement,” says Rao. But sadly, that is not the case. All announcements of successive governments have been on the quantum of FDI received rather than on the quality of FDI. 

The other big revelation is that from FY05 to FY13, nearly 54% of the FDI flows into the manufacturing sector were primarily through M&As. In other words, it did not result in fresh capacity creation. “It is thus evident that during the past decade or so, when India’s reported FDI inflows picked up significantly, there might not have been capacity creation in the manufacturing sector commensurate with the quantum of reported inflows, especially in what are termed as high and medium-high technology industries,” states the report.

French company Legrand, which has been operating in India since 1996, has acquired four companies till date. Jean-Charles Thuard, CEO of the Indian operations, attributes the strategy to the parent’s philosophy of growing inorganically. The group has made 140 acquisitions across the globe since 1970 with 32 companies coming into the fold since 2004. “Acquisition is a strong way to develop market share, enter into new business areas and also a faster way to gain access to new products and complete the product portfolio,” explains Thuard.

What is critical to note is that not all non-M&A flows have translated into new production capacities. The report highlights the cases of Samsung India Electronics and Sony India to make the point. Sony shut down its manufacturing operations in FY05 and is now engaged mainly in selling imported products and software development. The shutdown was due to the fallout of India’s FTA with Thailand. Similarly, Samsung India Electronics falls into a similar, if not identical, category, states the report.

“The company’s annual reports suggest that the ratio of ‘own production’ sales to sale of ‘traded items’ was roughly 1.3:1. However, imported raw materials and components constitute about three-fourths of total consumption, thereby making it more of an assembler rather than a manufacturer.”

In fact, if Make in India has to succeed, the government has to relook at FTAs as they freely permit multinationals and domestic companies to set up operations in any of the member countries. In recent years, India has inked a slew of such pacts with the Asean, Japan, South Korea and Sri Lanka. Car makers such as Hyundai and Renault have already shifted their export units for some European markets out of India, citing high logistical costs and duties levied by the EU on car imports from India “The first and foremost step by India should be to review all FTAs, investment agreements and tariffs to see which are not working to its advantage,” believes Rao.  

But for all the skepticism, hope is building up in equal measure — not just among the business community but also on the Street. A research head of foreign brokerage puts the euphoria in context. “The first time I got a call from an investor, who wanted to know how to play the Make in India story, I couldn’t resist cracking up. But it was not just one curious investor. It was only a matter of time before client calls increased and I had an eager bunch of heavyweight fund managers who, too, wanted to know how to play the theme. So, while it may be just a slogan for now, action on the ground [by Modi] is giving a sense of hope to investors that this time it’s for real.”

The common refrain is that if India managed a Green Revolution in agriculture when the-then PM Lal Bahadur Shastri coined the slogan, Jai Jawan, Jai Kisan, then Modi, too, should  be given the benefit of doubt. And before this issue  hits the stands, the brokerage house would have already put out a basket of stocks for investors to play around with.  

As for Arun Jaitley, who took a corner seat at a dinner function hosted by the CII at the Morosani Hotel, he had more than just company as Indian business magnates kept milling around him. As the evening progressed, the din in the room kept getting louder amidst the clinking of glasses. As courtesy would demand, Uday Kotak politely complimented the finance minister: “Good job, sir. You have done India proud.” Finding it hard to resist, I popped the question to Jaitley: “Does this burden of expectations scare you?” “It does,” replied the minister as he quietly headed towards the exit.