IT is an ill wind that blows no one any good. The sustained and steep fall in the exchange value of the rupee, for instance, is just the kind of crisis which actually holds a golden opportunity within it.

The precipitous fall of the rupee against the dollar may be bad news for the economy as a whole and for import-dependent industries, but it may turn out to be just what the doctor ordered for Indian manufacturing. The fall in the value of the Indian currency has not happened in isolation. As the rupee has fallen, so have other currencies – while yet others have appreciated during the same period. But as far as India is concerned, what should be of major interest is the appreciation of the Chinese Yuan versus the dollar.

YUAN FACTOR

Since 2005, since China removed the yuan-dollar peg, the Chinese currency has appreciated at over 4.5 per cent per year. In fact, if one leaves out the 2008-2010 period, when the yuan's value was frozen in the wake of the global financial meltdown, the appreciation works out to 7 per cent per year.

This is not to say that the yuan is realising its actual value. In fact, the artificially low level of the yuan had helped Chinese manufacturers and infrastructure providers make giant inroads into the Indian economy, and tilted the balance of trade sharply in China's favour.

Nevertheless, over time, China would find it increasingly difficult to prevent its huge trade surplus with not just the US, but most major global economies, from reflecting in the value of its currency.

In fact, other nations are increasingly coming together to force China into a more realistic foreign exchange rate. For instance, India, the US and Japan are meeting in Washington later this month to discuss common concerns – including the rising economic power of the dragon kingdom.

The Japanese are particularly paranoid, especially as their manufacturing competitiveness gets eroded at a faster rate. And India figures largely in the de-risking strategy, as Japanese manufacturers try to reduce the criticality of their China exposure. Combined with US fears over their growing trade imbalance with China, this has led to a global shift in attention towards India as an alternative centre for manufacturing.

DESTINATION INDIA

This has led to some remarkable changes in the Indian manufacturing scenario. While IT and services have been the poster boys of the India growth story, especially in overseas markets, India's manufacturing sector has been taking giant strides – albeit quietly. This is leading to some surprising changes in sourcing for global players, in a wide spectrum of industries. Japanese automobile manufacturer Nissan, for instance, has decided to make India its global production hub. Of the 185,000 units it has manufactured so far from its new Chennai plant, for instance, barely 35,000 have been sold in India. The rest have been exported. As it ramps up the capacity of its India unit to 400,000 cars a year, it is planning to service even more of its global markets out of its Indian manufacturing hub.

Handset manufacturer Nokia has also bet big on India. As was pointed out by this paper recently, it's Sriperumbudur manufacturing facility in Tamil Nadu is its largest in the world. And over time, it has started sourcing a variety of components, ranging from numeric pads to chargers, locally as well, leading to a corresponding expansion in scale for these vendors as well. Or take metal castings. US castings imports are moving out of China — but not back to the US. Increasingly, Indian die casting manufacturers are acquiring work away from China – for products which are ultimately destined for US markets. In iron castings, US imports from China in 2010 rose 2.6 per cent ($5.5 million). But similar imports from India rose by a whopping 30 per cent ($19.8 million).

DENIM PRODUCTION

Perhaps the most inspiring story of how Indian manufacturers are taking on Chinese competition comes from the textile sector. While rising crude prices and predatory pricing by Chinese manufacturers have hammered man-made fibre manufacturers, Indian denim manufacturers have become a global force.

The demand for denim, which has moved on from being merely the fabric from which jeans were manufactured to becoming the global youth apparel fabric, has been growing strongly, despite recession in major denim markets like the US and Japan. So much so, Indian denim manufacturers, who have already logged two quarters of strong bottomline growth, are expecting even better times ahead.

While domestic cotton prices, the main raw material for denim fabric, have been a big factor – Indian cotton prices are significantly lower than global prices and are expected to stay soft on the back of a bumper cotton crop – China's declining competitiveness in denim has been an equally important factor.

Though India and China were both considered cheap denim destinations, India has been gaining an edge over China, as inflation and rising labour costs, coupled with high cotton prices and a rising yuan, have made the Chinese less competitive.

While major denim buyers like Wal-Mart and VF Corporation are now looking to India for denim, some Ahmedabad-based denim makers have even managed to turn the tables on their Chinese counterparts, and are selling denim at up to 20 per cent lower prices than Chinese denim manufacturers – to Chinese jeans manufacturers!

This is the time for the government to stop hand-wringing over the rupee – and stop listening to lobbies pushing for various temporary sops, which will only help import-intensive domestic manufacture.

Instead, we need to provide clear policy support – and fiscal incentives – to the neglected manufacturing sector. Just like the Indian farmer, the Indian worker has proved – time and again – that he is globally competitive. While Indian engineering and automobile sector workers are matching their European and Japanese counterparts in terms of quality of output, our denim factories, or mobile phone component manufacturers or casting industry workers have shown that they can take on the mythical hyper-efficient, hyper low-cost Chinese worker – and win.

That they have managed to do so without policy sops or subsidies or government hand-outs makes this success story even more remarkable. It is time our policymakers also recognised this – and lent a helping hand.

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