As the latest move to advance India's industrialization, Prime Minister Narendra Modi's flagship "Make in India" initiative has made marked progress in domestic demand driven industries such as cellphone manufacturing. However, can such success be copied to other areas? And how will it affect India's overall industrialization process?

Under the policy framework of "Make in India" and "Digital India", the Modi administration unveiled its Phased Manufacturing Program (PMP) in August 2015 to increase the domestic production of cellphones. Specifically, within five years, the PMP aims to raise the country's cellphone production to 520 million units, significantly increase cellphone exports, at least double the ratio of local sourcing in manufacturing, and increase the domestic value added of the industry to more than 30 percent. To achieve this, the country has levied import tariffs on a range of products according to the order of complete product assembly, manufacturing of mobile parts, common component manufacturing and high-value component manufacturing. As a result, a comprehensive cellphone industrial ecology is rising gradually in India.

To date, policies designed for the cellphone industry have scored great achievements, with the country's cellphone manufacturing becoming a pillar of its manufacturing sector. In 2018, India became the world's second-largest cellphone maker and roughly 90 percent of the cellphones sold in the country are domestically made, making the cellphone industry a flagship of Modi's "Make in India" campaign.

However, can the cellphone success be copied to other areas?

If we divide latecomer countries' industrialization process into three stages from lower to higher - factor cost driven, domestic market demand driven and capital and technology driven - India has embarked on the industrialization journey against the conventional trend. In capital and technology driven industries such as oil refining and chemicals, pharmaceutical and IT service industries, India boasts strong competitiveness in the world; in domestic market demand driven industries such as home appliances, electronic devices and auto parts, India has made significant progress over the past few years; however, in labor-intensive industries such as textiles, toys and furniture, India has nothing to brag about. Such a development path, which contradicts the country's comparative advantage, means India often gets half the result with twice the effort as resources can hardly be allocated in the most effective way.

As a matter of fact, the prosperity of India's cellphone industry is to a great extent a result of the country's market size and the government's industrial policies, rather than a natural advantage resulting from economic endowment like low labor costs. International cellphone makers increased their investment footprint in India not because of the country's competitive factor costs, but because of the man-made cost gaps like these under the PMP. Some international cellphone makers are already heavily involved in India and therefore turn out unwilling to give up their market shares in such a fast-growing market.

The Modi administration uses this mindset to its own advantage, gradually introducing each sectors of the cellphone value chain with the PMP and finally creating a large-scale, cost-effective and properly functioning industrial ecology.

With issues such as land acquisition, labor regulation and infrastructure constraining the industrialization process, the prosperity of India's cellphone sector is largely due to some special conditions.

On the one hand, India has an enormous market and surging cellphone penetration ratio, which makes inte - rnational cellphone makers willing to settle for local production despite the low competitiveness of local production.

On the other hand, the cellphone industry, covering a wide range of areas, is both labor intensive and capital and technology-driven, therefore capable of avoiding cost disadvantages arising from India's faltering reforms on land, labor and infrastructure.

Under the circumstances, the PMP's success in the smartphone industry can hardly be copied in other sectors, especially those labor-intensive and export-oriented industries that prioritize factor costs. After all, prosperity created by market size and tariff policies is man-made in nature, rather than factor cost driven, therefore it will not enable India to fully tap its massive economic potentials.

Following the initial success of the PMP in the cellphone industry, the Modi government wants to speed up the "vertical implementation" of the program. It has brought forward the implementation date for customs duty on imported cellphones several times, in an attempt to speed up local production of high value-added components such as processors, display panels and camera modules. On the other hand, Modi aims to quicken the pace of "horizontal implementation" of the PMP by expanding import tariffs to industries such as TV sets, microwave ovens, digital cameras and even furniture and toys. However, such expansion of the PMP can hardly advance the country's industrialization process, and it lowers the operating efficiency of the broader economy because of the distortion effect of tariffs. The PMP of the Modi administration is likely to evolve to be a new manifestation of the "import replacement" movement - implementing protectionist, discriminatory customs duty policies in the name of protecting domestic infant industries, increasing economic independence and reducing the dependence on imports.

Such a movement, which was long implemented by the country, gave birth to rampant corruption, low efficiency and high-price and poor-quality products. Therefore, it has already proved a failure.

However, amid lackluster industrialization progress, a lukewarm job market and economic nationalism, the expansion of the PMP to more areas is very likely to lead India's industrialization process into a new maze.

The author is a research fellow at International Cooperation Center at National Development and Reform Commission with a research focus on South Asia issues.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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