Appreciable economic growth

By Kanayalal raina
Can India be the world’s next industrial hub?

A Chinese scholar recently asked how long it would take for India to reach China’s level of manufacturing. Indeed, India leapfrogged a revolution in manufacturing to become a service industry leader in the world with its rapid progress in ITC (information technology and communications). India’s service sector contributes 53 per cent to the GDP while Chinese service sector’s share is 40 per cent.

India’s manufacturing industry has, however, lagged behind and contributes only 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 had been a leading manufacturing nation for over a millennium. Since India’s manufacturing sector has not flourished as compared to China’s, it has not been able to absorb the growing number of people migrating from villages to towns in search of jobs.

The growth of IT in India has brought Indian technical personnel into the global arena, but entry into this sector has been restricted as it requires knowledge of English and secondary education. Only the manufacturing sector can absorb the bulk of migrants.

Recently India’s industrial growth rose to 11.7 per cent, signifying a resurgence and revival of manufacturing because this sector has the biggest weight in the index of industrial production.

Manufacturing growth suffered a lot after the global financial crisis and recession in 2008 and 2009, as it hit the exports. But China has come out of the recession more quickly than India and though it has faced a severe problem of exports 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 projects because in its huge fiscal package comprising 14 per cent of the GDP, the Chinese government went for the 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 was at its highest 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 on low-cost raw materials and through their expertise in manufacturing transform them into high-value products. No wonder, the Chinese demand for raw materials has helped to push up commodity prices the world over.

India’s manufacturing industry suffers not only from the problems of inadequate infrastructure but also owing to the bureaucracy’s style of functioning 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 will be 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. Shortage of water also is increasingly surfacing as a major problem for industry. The main problem in the future will be how to increase the supply of clean energy to industry as India has committed itself to reducing green house gas emissions by 20 to 25 per cent by 2020.

Despite so many problems, India is striding ahead in manufacturing as can be seen in the case of automobiles --- earlier it had specialised only in auto parts. 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 factory sector in India contributes 65 per cent to the industrial output and the rest comes from the small and medium enterprises (SMEs). They are not capable of handling huge orders and they are usually cash-strapped and lack the latest technical knowhow 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 are highly computerised and production is uniform, defect-free and cheaper.

The privately owned SMEs have grown faster than state-owned industrial units 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. The stimulus package of 4 trillion yuan on the whole has sustained manufacturing growth. The pace of manufacturing growth, however, would ultimately depend on strong income growth and consumption growth, which depends on the recovery of the world economy.

Around 50 per cent of the SMEs in India have been adversely affected by the global recession. Apart from power and 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 take time.

The availability of foreign exchange, knowhow 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). Only recently, India started receiving more FDI than before but the global crisis has led to a slowdown.

Yet India does have the potential of becoming a manufacturing hub of South Asia (if not the world) and more and more MNCs are coming to set bases in India for export to third countries.

India has a skilled labour force and a large pool of scientists and engineers (it possesses the second largest pool of such professionals in the world). But in the case of business climate, it is far behind China, especially in investor-friendly policies. Naturally, businesses coming from industrial countries find it easier to open their 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. Obviously, there is a lot of catching up to do.