Modi’s reforms may be defeated by a maze of regulations

The Indian prime minister faces several challenges if he wants to create jobs through manufacturing businesses, writes Amrit Dhillon.

A labourer in the western Indian city of Ahmedabad. Prime Minister Narendra Modi has set in motion the first major revamp in decades of India's archaic labour laws. Amit Dave / Reuters

Indian prime minister Narendra Modi has so far deliberately steered away from announcing any “big vision” for India. This is not such a bad thing. His approach seems to be that if he can fix a lot of small problems, something “big” will automatically emerge from the sum total of these piecemeal improvements.

But he is also being overly modest in saying that he is a “little man” concentrating on little things. His “Make in India” campaign, launched on September 25, is bold and, if successful, could catapult the economy onto a growth path and begin a new phase of development.

There is no reason why it should not succeed. India needs to create tens of millions of jobs to absorb the young people who will be pouring onto the market. The services sector cannot provide enough jobs. Only manufacturing can generate the numbers and for that, the sector needs to grow at 10 per cent a year or more for several years. Currently, manufacturing contributes only 15 per cent to India’s GDP, as compared to 45 per cent in China.

On the other side are foreign investors who are anxious to invest in India but are put off by the maze of clearances and approvals necessary to set up a factory – an ordeal that can take years, to the point where even Indian businessmen have voted with their feet in recent years and invested abroad instead.

The Indian market for goods and services is so large that every foreign and domestic investor wants a part of it. They know that if young Indians have well-paid jobs, they will want to spend. This spending in turn will create a larger market for manufacturers’ goods. Add to this the fact that manufacturing in China is becoming increasingly expensive, what is there not to like for investors? The only problem has been the difficulty of doing business in India.

The government has identified 25 industries in which India can become a leader. The success of India’s recent Mars mission has confirmed its reputation as an IT hub; the Make in India campaign needs to turn it into a manufacturing hub.

But it will take a big broom to sweep away the mountain of red tape. Mr Modi is not the first leader to promise that he will streamline approvals and clearances. Every prime minister for the past 20 years has been saying it. Investors are fed up with hearing lofty phrases about how the government will give them a “single window” clearance system. Nothing has happened. India still ranks 134 out of 182 countries in the World Bank’s Ease of Doing Business index.

Mr Modi addressed this tangle of regulations during a recent speech in New York, where he said: “If every day, I can end one law, then it will be an achievement.”

He needs to set up a special unit that can respond to business queries within a few days. It must ensure that all the ministries are geared towards the same goal. Under the previous government, one ministry did not know what the other was doing, often obstructing proposals that had already been cleared.

India needs to work on research and development or it will find it hard to match China’s pre-eminent position. It also has to tackle the issue of land acquisition. The previous government passed a populist law that makes it fiendishly difficult for anyone who wants to set up a plant or factory to buy land. US-based economist Arvind Panagariya has said that the new law is so crazy that it’s easier to buy land on Mars.

Mr Modi’s party, the BJP, lent its support to the passage of this law in Parliament when it was in opposition, and so far it shows no inclination of wanting to repeal it.

Mr Modi needs to apply his mind to this subject, as he does to the other equally intractable problem of reforming India’s labour laws to make them more flexible. As they stand, a factory owner who wants to sack more than 100 workers if orders dry up has to get government permission to do so.

So, for Make in India to succeed, there is a lot for Mr Modi to do. After trips to the US, Bhutan, Nepal and Japan since being elected in May, it is time for him to stay put in India and work on some of his “little” ideas.

He enjoys a reputation for effective implementation, but to do so he has to enlist the support of the state governments that have to issue many of the relevant business clearances.

Noble decisions taken in New Delhi can easily be undone at the state level. If Mr Modi can pull off Make in India, it will mark a new chapter for the economy that will be long remembered.

Amrit Dhillon is a freelance journalist based in India