Can India be the next industrial hub of the World?

India's agriculture has not grown fast enough to support the growing rural population and there has been a continuous exodus of people migrating from villages to towns in search of jobs

A Chinese scholar recently asked me how long it would take for India to reach China’s level of manufacturing. Indeed India has leapfrogged the usual agrarian to industrial revolution to become a service industry world leader. India’s service sector contributes 53 per cent to the GDP while China’s service sector’s share is 40 per cent.

India’s manufacturing industry, however, has lagged behind and contributes only around 16 per cent to the GDP while China’s manufacturing contributes 33 per cent. China is a world leader in manufacturing which is not surprising considering that until the nineteenth century it was a leading manufacturing nation in the world for over a millennium.

India’s agriculture has not grown fast enough to support the growing rural population and there has been a continuous exodus of people migrating from villages to towns in search of jobs. Such people have been absorbed in the informal or unorganised sector mainly and not in the high tech service sector.

Though the growth of IT in India has brought Indian technical personnel in the global arena, the entry to this sector has been restricted as it requires a knowledge of English and secondary education. Only the manufacturing sector could have absorbed the bulk of migrants.

Recently in December, India’s industrial growth has risen by 16.8 per cent, signifying a resurgence and revival of manufacturing because manufacturing has the biggest weight in index of industrial production. Manufacturing growth rose 18.5 in December 2009 backed by 46 per cent growth in the production of consumer durables. It is a laudable achievement as manufacturing had suffered a lot immediately after the global financial crisis as it had hit the exports.

China’s recovery has been even more spectacular than India and though it has faced a severe problem of export decline and a consequent increase in unemployment, the sustained growth in manufacturing has created fresh demand for migrant labour. In fact, there has been a shortage of migrant labour in China recently. The jobless have also found employment in infrastructure project because in its huge Fiscal package that amounts to 14 percent of the GDP, the Chinese government went for construction of capital intensive projects which proved to be very labour intensive.

Recently, China’s GDP registered a high growth rate of 10.7 per cent. It has been aided by high manufacturing growth which grew at its highest rate in five years in December 2009. Manufacturing activity has been aided by high labour productivity, government subsidies to buy appliances like refrigerators, huge investments in infrastructure and the availability of disciplined and skilled labour force.

The supervision of manufacturing activities at the shop floor level is also meticulous and the Chinese are able to produce almost zero defect products valued by quality brand name importers like Ralph Lauren. The value addition in Chinese manufacturing in 2000-2007 was $751 billion whereas it was only $34 billion in India. Obviously the Chinese work hard on low cost raw materials and through their expertise in manufacturing, transform them into high value products. The great Chinese demand for raw materials has helped to push up commodity prices, the world over.

India’s manufacturing industry suffers not only from problems of inadequate infrastructure but also problems of slow bureaucratic procedures, corruption and red tape.  For example the subsidies that the government gives to exporters take a long time to reach them. On the infrastructure side, the main lacuna is power. India is short of 50,000 MW of power in the next two years. Captive power plants are keeping the private sector factory units going but they are expensive to run and raise costs. Shortage of water also is increasingly surfacing as a major problem for industry. The main challenge in the future will be how to increase the supply of clean energy to industry as India has committed itself to reduce Green House Gas emissions by 20 to 25 per cent by 2020.

Despite so many problems, India however is striding ahead in some areas of manufacturing boosted by domestic demand. India has age old skills and traditions in gem cutting, jewellery and textiles. Yet China is able to capture the mass market because it can deliver huge orders on time.

The problem in India is that the factory sector only contributes 65 % to the industrial output and the rest comes from the small and medium sized enterprises (SMEs). They are not capable of handling huge orders and they are usually cash strapped and lack the latest technical know how and have poor access to markets. Only 15 per cent of the factories use high tech and have a low expenditure on R&D as compared to China. The textile mills in China however are highly computerized and production is of uniform quality and cheaper.

The privately owned SMEs have grown faster than state industry in China throughout the economic downturn because they had the advantage of more flexibility in response to the crisis. They were also able to get finance through the banking system due to new policy initiatives aimed at them. The stimulus package of 4 trillion yuan on the whole has sustained manufacturing growth.
Around 50 per cent of SMEs in India have been adversely affected by the global recession.  Apart from power, infrastructure, the availability of easy credit is a major constraint. Land acquisition for setting up clusters of small and medium enterprises and SEZs has been a problem in India as compared to China. In an authoritarian regime, it is easier to acquire land for industrial use than in India where problems of resettlement and rehabilitation of displaced persons takes time.

The availability of foreign exchange, know how and technology through foreign direct investment is also important in making China the industrial hub of the world. As compared to India, China has been receiving more than four times foreign capital than India. Between 2000 and 2007 India received $17.1 billion as compared to $78.1 billion by China.

Yet India does have the potential of becoming a manufacturing hub in South Asia (if not the world) and many MNCs are coming to set bases in India for export to third countries. It has a skilled labour force and a large pool of scientists and engineers — the second largest pool of such professionals in the world. But in business climate, it is far behind China especially in investor friendly policies and naturally foreigners find it much easier to open their company branches in China than in India.  A recent survey has ranked India 124th in terms of ‘economic freedom’ which includes freedom from corruption, business freedom and monetary freedom. Inflation control is also important especially when it has risen to 8.56 percent in January 2010. Obviously there is a lot of catching up to do before India becomes a manufacturing hub of the world.

The views expressed above belong to the author(s).

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Jayshree Sengupta

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