The Make in India lesson I learnt when I bought a television set

make in indiaVivek Kaul

Yesterday’s edition of The Times of India had a very interesting newsreport. As per the newsreport: “Data available with the Bureau of Indian Standards (BIS) shows that over 60% of the recently registered products are “Made in China.””
These include products like mobile phones, printers, power adapters, notebooks, tablets and so on. What this tells you clearly is that a vast majority of electronic products that we buy in India are not made in India, but in China.
Interestingly, the last time I bought a television set few years back, it came with a weird looking plug—something that I had never seen before. It wouldn’t fit into the electrical socket at home. It took a helpful neighbour to solve the problem. He told me that I would need a converter to fit the plug into the socket. The converter cost me Rs 25 and left me wondering that why did a company which sold a product worth Rs 15,000 inconvenience its customers for something worth Rs 25? Maybe marketing professionals can throw some light on that.
Last year when I bought a smart phone a similar experience awaited me. But this time around I was prepared and as soon as the smart phone was delivered at home (I had ordered it online), I went out and bought a converter, which cost Rs 20 this time around.
As you must have figured out by now, dear reader, both the products were made in China. Not just technology products which are made in China are flooding the Indian market. There are other products as well. As The Times of India newsreport referred to earlier points out: “There are a vast majority of goods — from electricity bulbs and thermometers to Ganesha and Laxmi idols — where the government is yet to have domestic standards resulting in unregulated entry of Chinese product.” Even Rakhis are now made in China. Indeed, this has been a worrying trend for sometime now.
The reason for this is fairly straightforward—no country has gone from developing to developed without the expansion and success of its manufacturing sector. As Cambridge University economist Ha-Joon Chang writes in 
Bad Samaritans—The Guilty Secrets of Rich Nations & the Threat to Global Prosperity: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than agriculture and services.”
And the Indian manufacturing sector cannot flourish with products being made in China. For a while there was great hope that India does not need to go through a manufacturing revolution to pull its citizens out of poverty. And that the information technology led services revolution would do that trick. But services by their very design have certain limitations.
As Chang writes: “There are certainly some services that have high productivity and considerable scope for further productivity growth—banking and other financial services, management consulting, technical consulting and IT support come to mind. But most other services have low productivity and, more importantly, have little scope for productivity growth due their very nature (how much more ‘efficient’ can a hairdresser, a nurse or a call centre telephonist become 
without diluting the quality of their services?).”
So, where does that leave us? Over the last few years the education infrastructure that has been built to feed trained individuals into the services sector has been huge. As Akhilesh Tilotia writes in The Making of India: “An analysis of the demand-supply scenario in the higher education industry shows significant capacity addition over the last few years: 2.4 million higher education seats in 2012 from 1.1 million in 2008.” In 2016, India will produce 1.5 million engineers. This is more than the United States (0.1 million) and China (1.1 million) put together.
The number of MBAs between 2012 and 2008 has also jumped to 4 lakh from the earlier 1 lakh. As Tilotia writes: “India faces a unique situation where some institutes(IITs,IIMs, etc.) are intensely contested while a large number of the recently-opened institutes struggle to fill seats…With most of the 3 million people wanting to pursue higher education now having an opportunity to do so, the big question that should…be asked…are all these trained personnel required? Our analysis seems to suggest that India may be over-educating its people relative to the current and at least the medium-term forecast requirement of the economy.”
What this means is that a large number of people going in for higher education will find it difficult to find jobs which are commiserate with the kind of money they have paid for their education, after they pass out. And they will not be the only ones having a tough time. India is adding nearly 13 million people to the workforce every year. And enough jobs are not being created.
This is something that the latest economic survey points out: “Regardless of which data source is used, it seems clear that employment growth is lagging behind growth in the labour force. For example, according to the Census, between 2001 and 2011, labor force growth was 2.23 percent (male and female combined). This is lower than most estimates of employment growth in this decade of closer to 1.4 percent. Creating more rapid employment opportunities is clearly a major policy challenge.”
And these rapid employment opportunities will be created only if more and more products are made in India and not China. For products to be made in India, major labour reforms need to happen.
A report in The Indian Express seems to suggest that the government is working on this front. It is planning to make amendments to the Industrial Disputes Act, 1947. The government is also planning to: “codify the Central labour law architecture wherein the labour ministry plans to merge all 44 Central legislations into four codes on labour laws — one each on wages, industrial relations, social security and safety & welfare. Apart from industrial relations and wages, other codes are likely to be released during the course of the year.”
Let’s see how far is it able to go with this. 

The column originally appeared on The Daily Reckoning on May 6,2015

Deficit Crisis: Hope Chidamabaram is praying to goddess Lakshmi

One of the many Diwali traditions that have come up over the years is the idea of leaving the doors and the windows of the house open. This is done to facilitate the entry of Lakshmi, the goddess of wealth, into the house.
The Union Minister of Finance, P Chidambaram, hopefully is a believer, and had left the doors and windows to his house open yesterday, in the hope that Lakshmi will come into the coffers of the government he is a part of.
The way the finances of the government of India are placed, it’s time for Chidambaram to do what most Indians do when they are stretched and stressed. Pray to god. And hope for the best. So if he isn’t a believer it’s high time he becomes one and starts praying that Lakshmi doesn’t give the government a slip.
The fiscal deficit of the government of India for the year 2012-2013(i.e. the period between April 1, 2012 and March 31, 2013) has been targeted at Rs 5,13,590 crore or 5.1% of the gross domestic product. Fiscal deficit is the difference between what the government earns and what it spends.
Targets need to be met and it’s unlikely that the government of India will meet the fiscal deficit target it has set for itself. As the Kelkar committee on fiscal consolidation recently pointed out “A careful analysis of the trends in the current year, 2012-13, suggests a likely fiscal deficit of around 6.1 percent which is far higher than the budget estimate of 5.1 percent  of GDP, if immediate mid-year corrective actions are not taken.” The committee estimated if the government continued to function as it currently is it will end up with a fiscal deficit of Rs 6,15,717 crore.
In order to control this burgeoning fiscal deficit the government can do two things, increase its income or control its expenditure. But some recent developments show that the government is more than faltering on both the fronts.
Take the case of the auction of the 2G telecom spectrum. The government expected to raise Rs 30,000 crore from this. But the actual number is nowhere near that. The other big entry into the revenue figure was supposed to come from the disinvestment of shares that the government holds in public sector enterprises. Not a single rupee has been raised on that front.
Also what does not help is the fact that the amount of tax collected seems to be slowing down. As economist Shankar Acharya recently wrote in the Business Standard “By end September the government’s tax receipts amounted to less than 40 per cent of the year’s Budget target.”
So things are looking bad on the income front. The other big headache for the government has been the fall of the rupee against the dollar. As I write this one dollar is worth around Rs 55.
And this means increased expenditure on the oil front. Oil is sold internationally in dollars and when rupee loses value against the dollar that means Indian oil companies have to pay more in rupee terms to buy the same amount of oil. Currently the price of crude oil for the Indian basket is at $106.09 per barrel. At Rs 55 to a dollar this means Rs 5835 per barrel in rupee terms. Compare this to October 4 when the rupee touched a recent high against the dollar. On that day one dollar was worth Rs 51.5. At that price crude oil would have been at Rs 5464 per barrel in rupee terms, much lesser than what it is today.
Hence, as rupee loses value against the dollar, the oil bill goes up. This wouldn’t have been a reason for worry if products made out of oil i.e. petrol, diesel and kerosene, were sold at their market price. But they are not. The government subsidises the oil marketing companies (OMCs) for selling diesel and kerosene at a loss. It also subsidises the OMCs for selling cooking gas at a loss. As the rupee loses value against the dollar it means increased losses for the OMCs unless prices of the products they sell are raised. And in the process it also means increased expenditure for the government and hence a greater fiscal deficit.
Also recent numbers released by Controller General of Accounts project a worrisome picture. Fiscal deficit for the first six months of the year (i.e. between April 1 and September 30) was at Rs 3,36,00 crore. This means that for the first six months of the year the fiscal deficit stood at 65.6% of the estimated fiscal deficit of Rs 5,13,590 crore. This clearly is not a good sign. If the government continues at the same pace it will end up with a fiscal deficit of Rs 6,72,000 crore or 6.7% of the GDP.
A high fiscal deficit is worrying. As the Kelkar report points out “High fiscal deficits tend to heighten inflation, reduce room for monetary policy stimulus,  increase  the risk of external sector  imbalances and dampen private investment, growth and employment.”
Over and above that a high fiscal deficit can also lead to a “likely…sovereign credit downgrade and flight of foreign capital.” As foreign money leaves India this would put further pressure on the rupee against the dollar, leading to a higher oil bill and in process a higher fiscal deficit. So a higher fiscal deficit will lead to an even higher fiscal deficit.
Hence, the government has to either increase its income in some way or control its expenditure. One way of doing that is controlling on subsidies which can be done by increasing prices of oil products as well as fertilizer. But that is unlikely to happen given that it is politically enviable.
So that leaves the government with only one way out and that is to get aggressive on the disinvestment front. Very little action has been seen on that front. But with the government getting a massive amount of bad press over the last few months for being involved in a variety of scams, whether investors pick up shares in public sector companies that the government decides to disinvest, remains to be seen.
In this scenario the government’s one and only hope is the Life Insurance Corporation (LIC) of India. The government can direct LIC to pick up shares of companies it decides to disinvest. When it comes to LIC it is best placed to carry out such operations in the last three months of the financial year (i.e. between January and March).
At that point of the year people start seriously thinking about their tax saving investments and in large parts of the country that means buying a new LIC policy or paying the premium for the existing ones. And that’s when the insurance behemoth has a lot of cash which can be used to rescue the government by picking up shares of companies that it decides to disinvest.
Till then Chidambaram can at best continue to pray to Lakshmi, the goddess of wealth and hope that it blesses the government.
The article originally appeared on on November 14, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])