India’s manufacturing dream gets a second life

N Madhavan | Updated on: Jun 23, 2022
Indian manufacturing must leverage the huge domestic market

Indian manufacturing must leverage the huge domestic market | Photo Credit: BASHKARAN N

Policy-makers should take a nuanced approach, keeping in mind the ground realities and the nation’s needs

The global manufacturing shifted from West to East in the early 1990s. India was just about beginning to liberalise its economy and was not ready to take advantage of the shift. China, on the other hand, had opened up its economy earlier and was well primed to grab this opportunity.

It did so in the best possible manner and in less than a decade, it became the manufacturing hub for the world. In 2019, per UN Statistical Division data, it accounted for as much as 28.7 per cent of the total manufacturing output globally (in value terms $4 trillion). India was ranked fifth behind the US, Japan and Germany with a 3.1 per cent share. As India embraced reforms in 1991 and opened up its economy progressively, its industry became efficient and gained competitiveness. Exports of manufactured goods increased gradually and by turn of the century, the ambition of India becoming a manufacturing power house was rekindled. The ground reality, however, was not conducive.

China’s dominance

By then China, through its massive scale, low labour costs, robust supply chain and far superior infrastructure, was delivering goods at a cost that was unimaginable for Indian manufacturers to match.

Toys, for instance, are a good example. The landed cost of toys from China was lower than the raw material cost that goes into producing them in India. The idea of India becoming the next China remained on paper and a section of policy-makers could never really overcome the fact that the country missed the manufacturing bus in the 1990s.

Two recent developments have given India’s manufacturing aspiration a leg up or ‘a second life’, if you will. First is the changing profile of the US-China relationship from ‘co-operating rivals’ to ‘competing rivals’. This triggered a trade war and exposed the excessive dependence of American companies on China for their manufacturing needs. The need to de-risk became real and urgent for them.

This gave birth to what is now called ‘China+1’ strategy. Global brands are scouting for alternative locations to manufacture their goods and reduce their dependence on China.

The second development is the Russia-Ukraine war and the ensuing geopolitics that is causing a new global economic order to emerge. Experts predict at least two distinct trade blocs — one comprising Russia and China, and the other with the US, Europe and like-minded nations.

Growing bilateralism

Globalisation, as it existed a few years ago, appears dead. The World Trade Organisation, despite the recent agreement at the 12th Ministerial, is weak and it is a season for bilateral trade deals.

This means that Western companies may not be able to access the most cost-effective goods and will have to settle for those produced in friendly countries that value human rights, nature and dignity of labour. Both developments present India with a great opportunity in manufacturing. Should the nation go for it? The answer is not an unequivocal yes.

The global economy has evolved a lot in the last 30 years. Today, the per capita spend on manufactured goods is declining, especially in the rich world. People there are spending more on services. Experts say that as countries get richer it is normal for consumers to spend more on services than manufactured products.

This is also the reason why many companies pivot from manufacturing just products to offering services as a package along with the product. The choice before India is whether to cater to middle-income countries’ demand for manufactured products or go along with the wave and offer services to richer nations.

Experts such as former RBI Governor Raghuram Rajan have repeatedly emphasised that India should not ape China but instead adopt a services-led growth model. The reasons are understandable. India cannot replicate the China model or its competitiveness for a variety of reasons.

When the eastern neighbour started its manufacturing journey, it built huge factories (that delivered massive economies of scale) coupled with large ports, airports and road network (which lowered logistics costs and accelerated the evacuation of manufactured goods) without having to worry about issues of land acquisition, public hearing, political and other opposition. Its autocratic one-party rule made all this possible and more. Labour availability was taken care through its unique ‘Hokou System’ and in the 1990s, there were no minimum wages and law against child labour. Poor safety norms and lack of compliance lowered the cost of labour significantly. Pollution norms were lax, large-scale government subsidies supported local industries and exports were kept competitive through currency practices that depressed the value of Yuan. None of these would be possible in India today.

China also used the time to build a very strong supply chain that makes available raw materials, intermediate goods and finished goods at globally competitive rates locally.

India’s priority

Also, India’s economic philosophy should be in line with what it wants to achieve. Its immediate priority is to create jobs for millions of youngsters who are coming out of colleges. If that is the case, a services-led growth will be preferable as it will create far more jobs than manufacturing which is increasingly embracing automation. With Industry 4.0, pace of automation will rise further and need for jobs will fall.

That apart, it is a fallacy to assume that the world will completely move away from China. Consider this: it accounts for almost 60 per cent of US companies’ needs. To re-create that capacity elsewhere will require huge capital. Through China+1, Western companies can at best look for incremental capacities in other countries. What can also not be ignored is China’s huge cost advantage. As a result, many say that West can never fully dis-engage from China.

That does not mean that India should give up its focus on manufacturing. Its domestic market is huge and will continue to grow strongly for another three decades or more. Its attempt to develop self-sufficiency through ‘productivity-linked incentive schemes’ is the right step forward. It can also be a global manufacturing base in select sectors such as auto components, textiles and leather where it has a strong domestic market, access to complete value chain and a good export presence.

Thus, a nuanced strategy with respect to manufacturing will work better than a wholesale approach.

Published on June 23, 2022
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