The Indian Economy Blog

December 1, 2005

India’s re-emergence in Manufacturing

Filed under: Basic Questions,Business,Growth,Regulatory reforms — Reuben Abraham @ 6:12 am

For the longest time, most analysts simply assumed that India had lost the manufacturing race to China and should therefore concentrate on developing its service sector, where it retained a competitive edge. In fact, there were those, like Stephen Roach, who argued that India would shoot itself in the foot by concentrating on building a manufacturing base. Not so, says Jo Johnson, who has written an interesting piece in the Financial Times about India’s growing manufacturing capabilities, especially as companies look to avoid being over-exposed to China (not to mention access to a huge internal market in India). First, Johnson points to the problems India faces.

No one denies that infrastructure remains the biggest single obstacle to “Made in India” emerging as a world force. With the exception of telecommunications, the cost of most infrastructure services is 50-100 per cent higher than in China, with Indian manufacturers paying twice as much for electricity and three times as much for rail freight. The gap is widening, too. China spent seven times as much as India on infrastructure in 2003, the latest year for which figures are available, and three times as much relative to the size of its economy – Dollars 150bn (10.6 per cent of gross domestic product) compared with Dollars 21bn in India (3.5 per cent of GDP), according to Morgan Stanley. India’s cash-strapped state and central governments are unlikely to be able to bring infrastructure up to Chinese standards any time soon, especially as politicians prefer to spray their limited resources at voters in the form of subsidies rather than invest in construction projects with a longer pay-back.

Specialists in process operations management say Indian factories are also years behind China’s. Mark Gottfredson, global head of performance improvement at Bain, the management consultancy, says he has yet to see “any real stars” in Indian manufacturing. “China has world-class manufacturing. India has third-world manufacturing. I have been in a lot of auto plants, textile factories and metal foundries and was not impressed. They do not pay as much attention to process flow, inventory management, continuous improvement or safety. I’ve been in foundries where there are sparks flying around and the operators don’t even have eye protection.”

The reforms process, however, seems to be bearing fruit.

These reforms included the gradual abolition of import licensing and the reduction of extremely high industrial tariffs; the privatisation of aluminium, car manufacturing, telecoms and information technology companies; the liberalisation of the exchange rate regime and the cautious relaxation of rules governing foreign direct investment. Their cumulative effect has triggered a consumption-led boom that, in turn, has for the first time created a genuine mass market for Indian manufacturers.

Manufacturing has started to enjoy its fastest growth in memory, expanding at 9.8 per cent in the five months to August compared with a year earlier, and business confidence indices are at their highest levels since 1995. After slashing their workforces in the 1990s, industrialists are adding capacity, not just to cater to domestic consumers but also to feed a growing appetite for “Made in India” abroad. Exports in the seven months to October, three-quarters of which were of manufactured products, were up 22 per cent.

In no sector is India’s emergence as a force in global manufacturing more evident than in mobile telecommunications equipment. It is not difficult to see why. With its operators adding 2m subscribers a month – and the figure is rising – India is the world’s fastest-growing big mobile telecoms market, with 52m subscribers today and probably more than 300m in 2009, analysts say. Yet until South Korea’s LG Electronics started a plant in Pune this March, none of the international market leaders offered a Made-in-India handset, preferring to import phones from around the world. Motorola will next month start to assemble phones in India in the “first step in a multi-phase manufacturing strategy for India”, while Nokia plans to open its first Indian manufacturing facility in Tamil Nadu in the first half of next year.

Baba Kalyani of Bharat Forge makes an interesting point about manufacturing and job generation.

“Manufacturing jobs will get created but it will not be like before, when unskilled labourers from rural areas got work. They will need to find jobs in construction, building roads, ports and power infrastructure . . . What makes Indian manufacturing competitive today is technology, not cheap labour. We tried it the other way around before and it didn’t work.”

This makes it all the more important for the government to relax rigid labour laws, such as the requirement that companies with more than 100 employees receive approval from state authorities to shed staff, and further reduce the number of sectors, such as handloom, in which only inefficient small-scale production is permitted. Even if it does all this, India would still struggle to find jobs for a working-age population set to expand by 71m to reach 762m in the next five years, let alone cater for the millions leaving the land for the cities and the 38m backlog of unemployed. “India has a serious employment problem and manufacturing on its own is not a panacea,” says Bibek Debroy, an economist helping the government to devise a national manufacturing strategy.

In related news, India’s economy clocked an 8% growth rate in the second quarter, compared to 6.7% last year. Financial services and construction seem to have registered the highest growth rates.

9 Comments »

  1. Please provide me with a book or links to article regarding econometrics.
    I am interested in seeing how data is collected when measuring large scale economies.

    Comment by Guru Gulab Khatri — December 1, 2005 @ 10:20 am

  2. Guru — a good place to start might be the list of online economics text (check the RHS sidebar on IEB)

    Comment by Prashant Kothari — December 1, 2005 @ 10:23 am

  3. Is the current GDP growth a delayed effect of the reforms during the NDA government? In that case, are we likely to see it fizzle out if the present government does not keep up its end? The GDP growth rate for 2005-2006 is also estimated at about 8%. Does anyone have theories about what is driving this growth? What has changed between 2002-2003 and now?

    Comment by Vivek G — December 1, 2005 @ 8:17 pm

  4. Infrastructure has always been a major stumbling block in India. It is only now that the government has woken up to the perils of inadequate electricity supply. Ofcourse, that doesn’t mean it isn’t acting fast.

    Look at the power situation in Maharashtra, a once power-surplus state, it is now struggling with a supply deficit of 2500 megawatts in winter! It is going to get far worse in the summers. Ofcourse manufacturing is going to be hampered. Even other businesses get affected and in turn affect market growth.

    Captive power plants are coming up in the Butibori Industrial Estate near Nagpur and at one near Thane. But there are few units at Butibori which will be able to take advantage. They were driven away due to poor infrastructure earlier. And it is unlikely that the tariffs are going to come down by any significant amount. And they are not going to solve the huge supply gaps this summer.

    Railway freight: IR will harm itself more in the long term if it reduces freight costs right now. The Government isn’t keen on investing in IR anymore. Budgetary support is limited and the system is groaning under an ever increasing burden of a booming economy. In the meantime, the railway minister resorts to tokenist rubbish like reducing the fares by a rupee. Even avoiding the 1 rupee reduction would have provided enough funds over a year to increase capacity over a congested route, purchase 75 locomotives or 3000 wagons or 1500 passenger coaches.

    Increasing passenger tariffs even by a few percent would help them a lot but doesn’t look like it will happen. In such a situation, reducing freight rates would spell disaster for a perennially short-of-funds organisation. Downsizing is important but again, it won’t happen. The communists need to get out of power for that. And despite everything, IR is still cheaper for bulk transporters. Until the highways get better, it will continue to be that way. And while the common perception is that privatisation would solve all of IR’s woes, it won’t. However, IR’s manufacturing units like CLW, DLW, ICF, RCF, RWF, etc. need to be privatised before anything else.

    Solutions? More investment. But where does the money come from?

    Comment by Alok Patel — December 1, 2005 @ 10:31 pm

  5. i believe infrastructure management and commitment towards making india as a true industrial destination is lacking in present days government policies. most of the cottage industries are throttled by red-tapism and hierachial corruption(corruption in stages,depending upon the rank and the status) has paralysed indian cottage industries.i talk about cottage industries because they been the major money earners for majority of rural population and also because they have an ability to earn a distinct advantage to indigenious indian products at market place. master crafts men ,skilled technicians are continuing their great legacy under pathetic conditions. if these people are given enough support in terms of finances, modern day training and if government take the responsibility of providing a good platform to market their products a revival of indian manufacturing sector can be seen. i believe any change should start from the bottom because ultimately it is the strength of roots that is going to create difference

    Comment by surya satish — December 3, 2005 @ 5:50 pm

  6. Vivek,
    It could be a result of the NDA reforms or the results of the earlier Congress government’s reforms. I don’t there is a way to isolate reforms and say reform V lead to X growth. I think if you look at the sectoral breakdown, it’s pretty easy to see what’s going on. Agriculture has not registered much change and services have maintained a rapid growth rate for a while now. The big improvement has come in manufacturing and industry, where perhaps scale is an issue and it takes time for firms to take advantage of reforms to grow rapidly. In addition, one could also argue that increasing incomes leads to consumption which in turn leads to growth.

    The trouble is that manufacturing still only represents about 17% of the economy. If the size of this pie could be increased to about 25-30%, I think India will probably start registering growth in the 10% region.

    Comment by Reuben Abraham — December 4, 2005 @ 12:03 am

  7. Hi Reuben,, I understand what you are saying,,, but it will still be an academic question as to what has changed between the early 200x (2001- 2003) and now,, the growth rate seems to have broken out from the 6% range to an 8% range.

    One can understand the growth in services due to the telecom, finance and IT but the growth in Manufacturing is puzzling.

    The regressive labor laws have not changed, the reservations for SSI (small scale industrial sectors) are still intact. Only thing one can think of is a some manufacturing PSUs like Maruti Udyog are now in private hands.

    In a few years there will be many papers explaining this, but it will be very interesting to know if there is any analysis available now.

    Comment by Vivek G — December 5, 2005 @ 7:34 pm

  8. I don’t understand why finance constraint of the government can be used as an execuse for lack of infrastructure investment. China didn’t have money, either, and they brought in private sector investment. Certainly, now their government has enough tax revenue to make public investment. But don’t forgot the increased tax revenues are brought about by the initital improvement in private sector. It is a virtious cycle.

    Comment by R-Squared — January 28, 2006 @ 10:03 am

  9. In Infrastructure there are numerous instances where Govt.does not have to invest and such options exist which have a direct bearing on the growth, to name a few in railway freight sector privatisation. What has railway done in the past is look to the west and do as the indians do. They wanted to make the freight wagons lighter, since 2001, trying to make them lighter by makign “steel design in aluminium” and not design in aluminium itself. If they wer eunable to do it they could have gone in for import or what they have done now is lease options. The world market works on leaes. IR were aware that lese rentals for such imported wgons/sagon bodies inaluminium would be lower than the maintenance /life cycle costs of steel wagons, they took 5 years to bringout this “still unclear” policy of leasgin or privatising freight corridor. Better late than never. This is the only possible way to have growth in freight traffic without any /some additional invstment.

    Comment by Anil Gupta — March 21, 2006 @ 9:56 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress