Wage growth in China and the subsequent rise of the ‘China, plus one’ supply chain strategy has opened doors for other growth-oriented Asian economies. India stands out as one such economy that is making unique progress in light of changing conditions in China. While countries in Southeast Asia have claimed various manufacturing niches that reflect certain qualities of their resources — cars in Thailand, textiles in Vietnam — India is the most logical candidate to replicate China’s success in becoming a manufacturing powerhouse.
At first glance, the current state of play for manufacturing in and exporting from India does not look particularly impressive. India’s rank of 142 is near the bottom of the World Bank’s Ease of Doing Business list, and the country continues to lag well behind other Asian economies in the share of GDP attributable to manufacturing.
Further, a report from consulting firm McKinsey observes, “India exports goods worth 17 percent of GDP but also imports manufactured goods worth nearly 16 percent of GDP, so the net contribution of the manufacturing sector’s exports to overall GDP is negligible. By contrast, China’s manufacturing sector contributes 47 percent of China’s GDP, and its contribution to net exports is large.”
The underlying fundamentals, however, tell a more optimistic story.
Approximately half of India’s 1.2 billion people are under the age of 26, and by 2020, it is forecast to be the youngest country in the world, with a median age of 29. China is forecast to have a median age of 37 by then.
Already, manufacturing labour costs nearly four times as much in China, at an average of $3.52 an hour, as it does in India, at 92 cents an hour, according to an analysis by Boston Consulting Group cited by Bloomberg Business .
Now, these are largely expectations for the future. There are no assurances young workers in India will be as productive as young workers in China have been. Labour costs in India may follow a different trajectory and rise quickly.
Other challenges have the potential to hinder manufacturing and exports in India. The country still has poor infrastructure. Unreliable roads, ports, and airport facilities add cost to logistics and require buffer stocks. Power outages are common. The regulatory burden is still high. There are many different import/export rules, and the overall complexity of trade compliance is a notable problem.
Prime Minister Narendra Modi was elected with the mandate of confronting these challenges, and his ‘Make in India’ campaign is one outcome of this. It calls for specific measures that would fix the country’s well-chronicled infrastructure problems and streamline regulation in a business-friendly way.
This vision is having practical effect. This January, when the Bombay High Court ruled in favour of Vodafone in a long-running transfer pricing dispute with Indian regulators, Modi’s administration ordered officials to extend the same rationale used by the court to all similar matters, including active ones involving IBM, Microsoft, and Sony. One tangible, headline-making reason to avoid India went away overnight. This is the type of signal multinational corporations react very favourably to.
Depending on manufacturingIndia rode the wave of information technology and business-process offshoring, but the India of tomorrow is much more manufacturing-centric. The much-ballyhooed export of IT and BPO services will not scale to make a meaningful increase in the country’s broader economic output — those are much smaller markets when compared to manufacturing and they cannot provide employment for those without university educations. But they are certainly a welcome part of the strategy.
The potential for multinationals to more fully incorporate India into their global manufacturing strategies is made more interesting by the fact that the country’s middle classes are rapidly ramping up consumption.
GM, for example, recently announced a new $1b investment to ramp up production capacity in one region in India even as it is winding down production in a different region. GM’s plant in Gujarat will shut down next year, while its plant in Talegaon will receive a capital injection to increase capacity.
This will better position the company to sell some of the cars domestically while also securing a direct route to the nearby African and West Asian markets. One could think of the newest GM investment in India as a creative way to hedge its expectations to sell to India’s consumers while still leveraging the full benefits of its workforce.
More broadly, companies in the biotechnology, pharmaceutical, electronic systems, renewable energy, oil and gas, and textiles sectors are also poised to become more dependant on India from both manufacturing and retail perspectives.
All of this comes down to having the right people, the right policies, and a high demand. India seems to have the demographic profile necessary for export-driven growth by manufacturing. And, although it has some way to go, it seems to be headed in the right direction on the policies. The demand, as is evident by growth of the China plus one approach, is obvious.
The writer is with Thomson Reuters