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“Make in India” has an Achilles Heel

Narendra Modi’s bold “Make in India” campaign has now attained worldwide recognition as the principal policy upon which India can catapult to higher growth.

The “Make in India” premise, however, is built on shaky foundations. Indian labor laws are draconian and reveal the legacy of India’s socialist history. Internal supply chains are lacking. Land reform remains ephemeral. Infrastructure and power are in dire need of massive investments. Passage of a long-awaited uniform goods and service tax faces friction from the opposition party.

Most pertinently, and on even weaker footing, is India’s failure to ensure quick export/import clearances. These clearances are critical to participation in Global Value Chains (GVCs).

GVCs are responsible for 70% of world trade in non-fuel manufactured products. Manufacturing sophisticated electronics or high tech products requires participation in GVCs. In contrast to China, Germany, Japan, Malaysia or Thailand, India’s participation in GVCs is negligible. Consequently, India imports these goods in large quantities.

Manufacturing of most technology products is a multi-stage process involving production collaboration among firms located in several countries. To ensure efficient production process, the system binds all participants to just-in-time production and supply schedules. This requires quick export-import clearances at each stage. Any delay at one port or customs may create disruption for the subsequent stages of production. Both the defaulting firm and country risk being tossed out of the network in such a scenario.

China, Japan, South Korea, Thailand and Malaysia have become high-tech manufacturing nations by establishing quality trade infrastructure. But India does not meet the benchmarks for efficient entry/exit at most ports and customs. Its export data confirms this narrative. While India’s overall share in world merchandise trade is 1.7%, its share in cutting edge technologies is less than 0.4%.

India primarily exports products that are tolerant of less-efficient trade infrastructure. Rice, cotton, diamonds, jewelry, yarn, garments, low-end engineering products, generic medicines and petrochemicals are some examples. 75% of India’s export earnings come from such products, but they account for less than 30% of world merchandise trade. This weak product profile sets the boundaries for India’s manufacturing and export growth.

Simply put, most of India’s manufacturing and exports end up chasing a small fraction of the global trade basket. This will not change until India’s ports and customs meet world-class benchmarks.

The following three steps can radically improve the system:

  1. India should make all export-import services available online with minimum human contact and clear export/import consignments in less than a day. Because hundreds of ports, airports, customs stations, central excise offices, inland container depots and container freight stations still rely on standalone processing and manual documentation, India remains a far cry from the integrated paperless environment required for faster clearances.
  1. India should allow green channel clearances based on self-declaration at the factory and port. This will ensure quicker transactions and better use of infrastructure. It can begin by scanning the profile of the top 11,000 exporters that account for 85% of India’s exports. Penalties should be steep for defaulters.
  1. Lastly, India should upgrade physical facilities at its five major ports so that they meet global standards for timely delivery. It should also set up three new world-class ports/industrial complexes. This model has proved very successful in China, with products in China travelling only a third of the distance between factory and port than products in India.

To emerge as a world leader in manufacturing, India must create the conditions for participation in GVCs. In order to do so, the lofty rhetoric of Modi’s “Make in India” campaign must marry ground-level realities by ensuring efficient export/import clearances.

The author, Ajay Srivastava, is an Indian Trade Service Officer.

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