India’s manufacturing opportunity
There is a considerable gap between India’s manufacturing potential and its realization
The
effects of years of rapid growth are being felt increasingly in China’s
manufacturing sector. According to a recent report by research group
Euromonitor International, Chinese factory wages—which have trebled over
the past decade—now exceed those of almost every major Latin American
country and are closing in on pay levels in the weaker Eurozone
countries. Thus far, China has leveraged its abundant supply of cheap
labour to emerge as the world’s leading manufacturing destination. But
the fact that labour is no longer so cheap could potentially have
multiple ramifications.
Low-cost production jobs, especially in the apparel, toys and cheap
electronics sectors, are now moving out to other countries, mostly in
South and South-East Asia, which have a steady supply of cheap labour.
There is research to suggest that India could potentially be one of the
countries to benefit from this realignment in manufacturing trends.
Last
year, the Global Manufacturing Competitiveness Index published by
Deloitte Touche and the Council on Global Competitiveness indicated the
rise of the “Mighty Five”—Malaysia, India, Thailand, Indonesia and
Vietnam (MITI-V). According to the report, this group will emerge as the
“New China” by 2020 given its abundant supply of cheap labour,
favourable demographic profiles, and market and economic growth. And the
World Bank echoed similar sentiments in a 2016 report.
These
are intriguing possibilities. The government aims to increase the share
of the manufacturing sector in gross domestic product (GDP) to 25% from
its current level of 15%, supporting just 12% of the workforce. But
there is a considerable gap between India’s manufacturing potential and
its realization. After all, the United Progressive Alliance had set up
the National Competitiveness Council in 2004 with similar aims, to
little effect. And that wasn’t the first time the government of the day
has missed the bus on this issue.
The
‘Mighty Five’—Malaysia, India, Thailand, Indonesia and Vietnam—will
emerge as the ‘New China’ by 2020 given its abundant supply of cheap
labour, favourable demographic profiles, and market and economic growth
There
are three key challenges. The first is the gamut of internal problems.
These are well-known and include numerous regulatory roadblocks,
unfavourable land and labour laws, inadequate transport, communication
and energy infrastructure, among others.
A
combination of these internal problems has also caused a structural
imbalance: Small and medium enterprises, not large factories, dominate
the Indian economic scenario. About 131.29 million people are employed
in as many as 58.5 million establishments, according to the sixth
economic census released last year. Some of these enterprises are
“babies” that can be scaled up but many may be “dwarfs” that will not
grow. If India has more dwarfs than babies, this will prove to be a
serious drag on its manufacturing potential; only large enterprises have
the economies of scale that can make India truly competitive.
Second,
India faces stiff competition from South-East Asian and other South
Asian countries which may be smaller in size but are better integrated
into global supply chains. Indeed, the Economic Survey 2016-17 sounds a
warning here. It starts by noting that “India is well positioned to take
advantage of China’s deteriorating competitiveness”, particularly in
the apparel and footwear segments. But it goes on to say: “The space
vacated by China is fast being taken over by Bangladesh and Vietnam in
the case of apparels; Vietnam and Indonesia in the case of leather and
footwear. Indian apparel and leather firms are relocating to Bangladesh,
Vietnam, Myanmar, and even Ethiopia. The window of opportunity is
narrowing and India needs to act fast if it is to regain competitiveness
and market share in these sectors.”
India
faces stiff competition from South-East Asian and other South Asian
countries which may be smaller in size but are better integrated into
global supply chains
The
third challenge is perhaps the most difficult—global technological and
geo-economic changes. The former has led to an increasing quantum and
quality of automation at every level of the manufacturing process.
Robots are fast becoming the norm on factory floors, and it is only a
matter of time before they take over today’s labour-intensive sectors.
The latter, meanwhile, points to greater trade protectionism and
shortening global value chains—both inimical to the sort of
manufacturing success China has enjoyed.
It
has been argued that India should not be locked into becoming a
low-cost manufacturing hub—the world’s shop floor, as China is sometimes
pejoratively called—but shoot for high-value manufacturing and
innovation.
Do you think India can realize its potential in low-cost manufacturing?
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