India is standing at the altar of high growth path by leveraging on its cheap labour advantage. To realize its full potential, the present NDA government has unveiled its 'Make in India' initiative. And Prime Minister Narendra Modi is leaving no stone unturned to make this dream a reality. Through a spate of overseas trips, the prime minister has already inked a slew of economic, strategic and defence agreements with developed economies of US, Canada, France and Germany. While this step is certainly in the right direction, it is equally important to create the right enabling environment for successful functioning of business.
Ignoring this critical aspect can have serious ramifications. For example Mexico, with 40% of its labor-force employed in small and informal businesses, has seen its economic growth slow down to low single digits after it signed a Free Trade Agreement with North America in 1994. Low productivity in its traditional sector is to be blamed for the slow growth. This becomes all the more critical for India where a whopping 84% of the manufacturing employment is still provided by the micro and small enterprises that are seeped in low productivity. In this respect, India needs to take a lesson from neighboring country China. China has only 25% workforce in the small and informal enterprise but has still managed to transform into an export powerhouse through strong labour laws.
Therefore if India has to emulate the success of China, it has to focus on improving the productivity of the small & informal business sector. This can be achieved through provision of better infrastructure and skills, flexible labour regulations and laws for setting and winding up of business. It remains to be seen whether the government is willing to do the hard work of bringing about these structural reforms necessary for the country to capitalize on the acquired manufacturing capabilities.