If India is to fix its recent economic problems it should try to become the next factory of the world, say the pundits. But what is the logic behind this agenda?
Sushil Suresh
India’s impressive economic growth in the last decade presents an anomaly, according to the mantras of modern economic development. Unlike the great growth stories from Asia, India’s economic miracle had little to do with a take-off in manufacturing. It was the vibrant services sector that powered the revolution in India’s economy. Note: it “was” the vibrant services sector. The “was” is crucial in that statement, because the services sector too seems to be showing signs of faltering, like the other sectors of the economy. However, the reasons are not necessarily the same. Apparently, the manufacturing sector’s woes are of a different nature to that of the services.
Manufacturing was supposed to be the backbone of India’s economic growth, providing employment to its huge workforce and meeting the needs of a large domestic market. This was in line with the changing trends in the world economy, and an accordingly changing Indian economic agenda.In the last decades of the 1900s the Indian economy moved from being a closed one – aiming to protect its domestic industry from foreign competition in order to build self-reliance – to an economy open to foreign participation. The Indian economy gained considerable momentum since then by attaining and sustaining, till recently, a GDP growth rate of over 7%.
The last OECD economic survey for India, released in June 2011, says: “The Indian economy has been catching up quickly in the past two decades, and weathered the global recession well. In just over 11 years, income per capita doubled. Wide-ranging reforms and increased investments have lifted potential growth to almost 9%, the highest in Indian history, helped by improvements in infrastructure.”
One year later, another assessment of the Indian economy by the World Bank has this to say: In 2011, India’s economic growth has slowed to below 7%. Industrial sector output growth briefly slipped into negative territory. The slowdown in GDP growth witnessed over the last two quarters is likely to extend into the coming fiscal year because of the weakness in investment. In FY2011-12 and FY2012-13, GDP growth is forecast to reach around 7-7.5%, a significant slowdown from the 9-10% growth in the run-up to the global financial crisis. The slowdown is at least partly caused by structural problems (power projects facing delays due to the lack of coal and gas feedstock, mining and the telecom sectors hit by corruption scandals, unavailability of land and infrastructure). Tighter macroeconomic policies, slow growth in the core OECD countries and worries about another global recession, and the base effect of high growth in FY2010-11 in agriculture also weigh down on growth.”
These observations and the analyses by several other experts all point to the urgent need to build up India’s manufacturing capability, both to meet future challenges and opportunities in the global economy as well as to lay the foundations of a strong domestic economy. However, although the share of theagriculture sectorin GDP declined, between 1975 and 2004, as the industrial and services sectors’ share rose, the contribution of the manufacturing sector has worryingly remained the same, increasing marginally from 14% to 16%. This is in stark contrast with China, which has a manufacturing sector contributing up to 35% of its GDP, and the figures are similar for many other emerging economies.This is the problem that the Indian economy presents, because India is one of the countries that have emerged on the global economic stage in recent decades as potential forces to be reckoned with.
The emergence of China, as well as the group of Asian powerhouses, as the factory of the world has created the formula for growth and development in the current global economy. India deviates from this model in an important way. As a journalist recently wrote: “India’s agrarian economy leapfrogged into a services-dominated economy after the economic reforms of the early 1990s, skipping over industrial growth. A large share of the country’s labour force is still stuck in agriculture.” In China, however, manufacturing has been a massive employment generator, pulling people away from agriculture, and manufacturing exports contribute significantly to its economic growth.
A few decades ago China and India, economically speaking, had more similarities than they have now. But in the 1980s China initiated a set of reforms that freed its agricultural labour force to move to manufacturing.The Chinese economy had also opened up to foreign direct investment in export oriented sectors during the seventies, whereas the Indian economy liberalised two decades later. China pursued foreign investment proactively by reforming its labour laws and other market rigidities that were of concern to international investors. All of these measures led to high rates of employment, higher incomes and unprecedented growth.
This is the story of the China miracle. And, the consensus seems to be that, as in China, India’s new engine for growth has to be manufacturing.When one compares the manufacturing sectors of both countries this is a compelling diagnosis: manufacturing will steer India onto the path of greater prosperity and a sound economy. The problems are easily identified through a comparison of the respective manufacturing sectors of both the countries: India’s manufacturing is dogged by poor infrastructure, intermittent power supplies, clogged ports and pothole-ridden roads.
Last year, India’s Union Cabinet approved a long-awaited and ambitious National Manufacturing Policy (NMP) aiming to set up mega industrial zones, create 100 million jobs by 2022 and put India on par with China and Japan. The NMP aims to raise manufacturing’s contribution to the GDP to 25%. India has to generate employment in the millions (twice as many as the 100 million the NMP sets out to create) if it is to reap its demographic dividend manufacturing will be the provider of most of these opportunities for India’s growing workforce.
The NMP plans to establish National Investment and Manufacturing Zones (NIMZs)benchmarked against the best manufacturing hubs in the world.These zones will have at least 5,000 hectares each and they will be designed to attract international manufacturing expertise and business. The NMP was welcomed by industry associations and several other observers, but there were many critics insisting that its targets were beyond the capabilities of the nation. Astute critics also say that the bulk of India’s workforce, at the moment and into the future, will not have the skills and training to take advantage of potential opportunities in manufacturing.
The debate about India’s economic performance acknowledges that the leading role in the global economy today is not played by nation-states but by the financial markets. It is this new reality that the Indian state is urged to adapt to. China’s success assumes significance precisely in this context, i.e. its ability to reform its economy and transform itself into an attractive base for international investors. It is also readily acknowledged today that India’s growth is closely tied to developments in the global economy. And while India tries to make its exports competitive and grow its modest share in global trade, much of the Indian economy’s recent successes stem from the size of the domestic market and the presence of Indian companies in this market. This same domestic market is as appealing to international investors as the opportunity to set up operations in India to take advantage of potentially cost-effective local resources like labour and infrastructure.
Take the case of electronics: The electronics sector has emerged as an important segment in manufacturing and it has contributed significantly to economic growth. The electronics market has grown at a remarkable CAGR of 25% in the last five year and was estimated at $45 billion in 2010. However, it has a minor share in the global electronics market, accounting in 2009 for just over 0.6% of global exports of electronics goods. Part of the reason lies in the fact that the majority of production is for the domestic market, and only 5% is meant for export.
China remains the dominant player in the global market for electronics exports and it has more than tripled its share in the main markets India exports electronics to (US, UK and Singapore). China supplied close to 35% of US imports of electronics in 2009.Yet the growing demand in the Indian market has attracted global attention, despite the industry’s low share in world market, and the industry attracts considerable foreign investment. Such examples can be multiplied to show that India’s needs for growth today are about attracting foreign capital and knowhow for the domestic market as well as for Indian companies to gain a foothold in overseas trade. This means that India’s growth and economic performance, just like the other successful Asian nations, are inseparable from global conditions.
In the global economy of the early 21st century, the division of labour between Asia’s big economies is something like this: China manufactures everything, from shoes to computers. India is the world’s back office, and it specialises in things like fixing software glitches to chasing down credit card debt, a writer said recently.
The services sector
According to an ET Intelligence Group study last year, in the last decade when manufacturing was stagnant and struggling, the share of services to the economy grew from 37% to 52%. The report says that, of 1.4 million jobs created between FY06 and FY11, 56% were added by companies in the services sectors, which includes banking and finance, healthcare, hospitality, technology, telecom, trading and retail. These companies created four out of seven jobs in the country over the past five years, far outpacing the manufacturing sector.Manufacturing jobs did increase by 35% during the period, but at a much slower pace compared to the 66% growth in services sector employment.
Another case in point is India’s internet technology industry, which continues to expand, despite weak economies in key markets in the United States and Europe, thanks to domestic growth and a push into new regions like the Middle East and Africa.Revenues for India’s information technology and outsourcing industries are expected to cross $100 billion this financial year, a 14.8% increase from last year and double 2007, the National Association of Software and Services Companies (NASSCOM), India’s technology industry association, said in a recent report. The group, which has over 1,200 corporate members, predicts that revenues will reach $225 billion by 2020.
Total revenue in the sector is expected to reach $101 billion in the year that ends March 31, 2012, the report said. Exports, or work done for clients outside India, will make up $69 billion of that figure. Growth in the domestic market is expected to be 16.5%, to $32 billion.A rise in global technology spending is also a key factor behind the industry’s increase.
It is clear from cases like this that India’s integration in the global economy is structuring the nature and direction of its economy. There is no doubt that India’s infrastructure needs to keep up with the new demands on the economy. It is also clear that back office operations or a booming IT and consumer electronics sector cannot solve the need to employ the nation’s mammoth workforce. However, it is important to keep in mind that a nation cannot autonomously steer the course of its economy, because a national economy is made up of a variety of sectors that interact with other regional economies and nations in a variety of ways. A particular sector of the Indian economy is subject to various cross-currents arising from within India’s economy and society, and these cross-currents are often an outcome of several known and not-so-well identified global economic influences.
It would be lazy to join the chorus that keeps tirelessly repeating that India needs to fix its roads, ports, railways and revamp its labour laws. These measures may make India more attractive to foreign investors even as it enhances industrial productivity, and make life more liveable in an urbanising India. Such an outcome can be a shot in the arm for Indian entrepreneurs seeking ties with more established global players, and in the process the Indian consumer too will benefit. Yet global economic competitiveness defined solely in terms of today’s large investment interests in the rich world ignores the significant role India’s indigenous entrepreneurship has played all through its history. Even to this day India’s gems and jewellery exports make up a noticeable part of its exports. Indian entrepreneurship has managed to successfully carve a place for itself in a variety of sectors and businesses, be it banking, finance, manufacturing, trade etc When we compare India to other nation’s and judge it as lacking we tend to ignore the unique historical dynamics that have made Indian business what it is today: a crucial factor here is the operating environment that shapes the opportunities and choices an Indian business individually or the Indian economy as a collective entity responds to.
How India will deal with its demographic and labour problems whether it is through a combination of manufacturing, the services, tourism is important not just for India but for the global economy too. India’s workforce and other resources are important capabilities that can be developed to the advantage of the current global economy. But there might be something new that emerges out of the Indian entrepreneurial spirit interacting with today’s global economy. Even as the global economy expects India to find a way to become the next China, the Indian path may show that there are other ways to economic success.What else is entrepreneurship?
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