Opinion: Thrust on manufacturing crucial
India must integrate into the global value chain ecosystem and tap into service sector’s growth to advance its manufacturing
By Chavi Asrani, Charu Grover Sharma
Since the start of the 21st century, two of the most populous Asian countries, India and China, have challenged the dominance of Western economies, witnessing the fastest growth that is likely to continue in the next five decades. During the 1990s, China and India were the 11th and 12th largest world economies, respectively, with similar GDPs. Today, China is an upper-middle-income country, while India is a lower-middle-income group economy.
Till the existence of the Soviet Union, the two Asian countries adopted an inward-looking economic policy. Learning from the growth story of Asian Tigers propelled by industrialisation and exports, in 1978, China adopted the Open-Door Policy. This allured foreign companies to invest in China to take advantage of its large, low and semi-skilled workforce for manufacturing. China also had impressive industrial facilities to attract foreign direct investment (FDI), which brought along cutting-edge technology and management practices, advancing its manufacturing. In the 1980s, China grew at an annual rate of about 10%, uplifting its 800 million citizens out of poverty.
Liberalisation
However, during the 1990s, India was compelled to liberalise due to the foreign exchange crisis. Post-liberalisation, India witnessed the world’s third-highest export growth after China and Vietnam. But while China’s exports comprised low-end products like toys and trinkets, India’s exports comprise highly skilled manufacturing and services like engineering goods and software thereby, generating opportunities favouring the English-speaking, well-educated Indian minority, while prospects for larger sections of India’s population remained limited. India’s growth was characterised by de-industrialisation.
India’s political stability, thrust to infrastructure development and availability of a large workforce make it an attractive investment destination. The government initiated the ‘Make in India’ programme in 2014 to establish a strong manufacturing sector, the contribution of manufacturing to the nation’s GDP remains at a two-decade low due to the time lag between investment and growth. Investments that India attracted are mainly in the telecommunications, software, services and retail sectors. This nature of investment is not in line with the genesis of the ‘Make in India’ programme ambition to establish merchandise manufacturing to achieve inclusive growth for low-skilled workforce.
Atmanirbhar Initiative
Next, to propel India’s vision of ‘Sabka-saath-sabka-vikas’ (inclusive growth), the government of India introduced the Atmanirbhar (self-reliant) initiative. However, corporate India grapples with bureaucracy hurdles, excessive labour regulations, and complex taxes and tariffs that prevent India from taking advantage of its demographic dividend. In 2010, a Nokia factory near Chennai producing 15 million phones closed its operation in 2014 over a $1.5 billion taxation dispute. Over a dozen major companies like Vodafone and CAIRN also got stuck in tax disputes during 2014, resulting in India losing FDI to economies like Vietnam, Indonesia, and Mexico.
Currently, with the hostile China plus one strategy, India has an opportunity to attract FDI in manufacturing. To harness this, India must integrate into the global value chain ecosystem. India must tap into the service sector’s growth to advance its manufacturing. In the last three decades, India’s manufacturing sector contributed approximately 15% to its GDP annually, merchandise exports contributed about 12% to the GDP, and its share in world merchandise exports was below 2%.
China Initiative
During the same period, China’s manufacturing sector contributed about 30% to its GDP, with its merchandise exports adding around 20% to its GDP, and its share in merchandise exports to the world was around 14%. China’s high merchandise export contribution was possible with infrastructure investment, which transformed it into a global manufacturing hub. India too needs massive investments in infrastructure and a robust policy framework.
China effectively skilled its workforce, but with its rising wage rate and aging population, it could be the first country in history to be old before it gets rich. India, with a population of 1.7 billion, has a massive young workforce, with 65% of its citizens below the age of 35. India has a three-decade window to leave China behind and become the world’s largest country. As per Bain & Company, in the next decade, approximately 500 million Indians may join the middle-income group. With a growing middle class, India’s demand and purchasing power will increase. The gap created by China’s aging population will be filled by India.
Implementation Matters
To harness the demographic dividend, India must improve its business environment — quality of workforce, infrastructure and logistics. In 2016, India undertook massive banking sector reforms and introduced the Labour Code in 2019; National Education Policy-2020 and the Production Linked Incentive (PLI) Scheme in 2021. But it is the implementation of these that will shape India’s growth story. India must resolve issues related to bureaucratic delays, judicial overload and corruption on a priority basis. As per the World Bank, India takes about three times more time to enforce contracts vis-à-vis China and about eight times more time vis-à-vis Singapore. Delayed contract enforcement and dispute resolution hampers the ease of doing business. With the Insolvency and Bankruptcy Code, 2016, and the Arbitration and Conciliation (Amendment) Act, 2019, the government of India is working towards reducing bureaucratic delays, but more attention is required towards these concerns.
India requires stronger reforms to achieve inclusive economic growth. It must consider more tax incentives and compensation for new-age manufacturing sectors like mobile phones, defence equipment, and lithium batteries. A robust policy framework is needed to scale sectors like textiles, leather and automotive components. Today, Vietnam and Bangladesh have been able to surpass India in textile exports due to their early and timely free trade agreements (FTAs) with the importing countries.
India’s manufacturing sector can advance with coordinated government and private action and by integrating into global value chains. Instead of cutting costs, India must focus on skilling its workforce, developing quality infrastructure, and reducing trade barriers. It is critical that India expedites infrastructure development and adopts innovative technologies to enable flexibility for the manufacturing sector growth. India must utilise its strength in a timebound manner with apt policy initiatives to support its manufacturing sector to propel the Indian century.
(Chavi Asrani is Associate Professor, OP Jindal Global University. Charu Grover Sharma is Assistant Professor, Indian Institute of Foreign Trade, Delhi)
