MANUFACTURING IN INDIA

INTRODUCTION

India’s economic growth since the liberalisation of the 1990s has been driven by the services industry. However, India’s large and youthful population needs jobs and expansion in manufacturing. This is essential for the country to maintain high rates of growth. The goal the Modi government has set is to make India break into the top 50 in the World Bank’s ease of business index ranking from the current 134th position. In an attempt to build India’s industrial base nationwide, Modi is pushing the Make in India campaign, designed to attract foreign investment by highlighting the ongoing changes.  “Make in India” will have to go quickly from being a statement of intent to real action on the ground.

  It should imply producing for India and for the world. Making only for India will convert it into a form of import substitution. Making for the world makes the system more efficient. On the other hand, people wonder whether making for the world is even meaningful in the changed world context. Making India the base for the production of goods and services for export is not a bad idea. But to convert this idea into reality, the Indian economy has to be much stronger. Markets across Indian towns and cities that are flooded with Chinese products, more so around festivals such as Deepavali, are grim reminders of how Made-in-China has come to dominate homes and offices. From furniture and gadgets to industrial equipment, India is importing almost all products from its neighbour, even yarn for saris. 

 Factors Leading to China’s Success in manufacturing are:

1. Preferential Government Policy
     Among developing countries, the openness of China’s trade and industrial policy are often cited as its comparative advantage. The manufacturing sector requires:-

 A) large provision of investment capital

B) coordination of the localization process and

C) the monitoring of technology transfer.[1] 

 More specifically, in the automotive and electronic sectors, the emphasis is on promotion of learning rather than innovation. To further develop these industries, the government needs to be more interventionist. Local governments such as Shanghai have been very successful in coordinating investments across firms in the automotive industry to ensure a smooth supplier network. To date, the Shanghai area is considered one of the most robust manufacturing centers for electronics and automotive parts.

The Chinese government has led investment in the manufacturing sector by giving preferential loans to targeted industries. In recent years, the government has promoted growth in the value added manufacturing industries such as electronics and automotive components.

Additionally, the ease of doing business in China is very important. Compared to other countries in the Asia-Pacific, the cost and time to start up and close a business are lower in China. Moreover, the costs and procedures involved in importing and exporting a standardized shipment of goods in China are less than countries in the region.

2. Foreign Investments

       

By welcoming foreign investment, China’s open-door policy has added power to the economic transformation. In 2005, China received $153 billion in foreign direct investment (US China Business Council). This foreign money has built factories, created jobs, linked China to international markets, and led to important transfers of technology. Through this strategy, multinationals have brought large sums of capital and senior talent to China, helping China develop its manufacturing arm without relying on local institutions. Joint venture firms have also been a huge boon for the Chinese manufacturing sector. These foreign-invested companies operate by employing local managers to teach management, production, and marketing skills to local employees.

3. Infrastructure Investment
  One of the most important success factors is China’s superior infrastructure. It is especially essential in manufacturing. To transport raw materials and finished products, good roads are needed. Sound facilities and a good system of power supply are required for high quality, uninterrupted production.
China invests heavily in maintaining its transport system. It makes enormous efforts to lower congestion levels on main railways. Additionally, China has built 25,000 km of four- to six-lane, access-controlled expressways in the past 10 years.

Having a stable power supply is very vital to manufacturing efficiency. Power outages can lead to loss of sales by forcing downtime or idle capacity on managers. Power disruptions waste material, damage equipment, add to maintenance and repair costs, thus increasing the overall cost of doing business in a country. In China, power outages happen on average every other week, which is considered low, compared to other developing countries. To prevent power shortages, China continues to invest in power generating structures. The Chinese government has paid close attention to investing in infrastructure such as roads and transportation systems, manufacturing machinery, and communications systems.

4. Human Capital
    In addition to its vast supply of cheap but skilled human capital, China has large numbers of foreign educated people coming from Silicon Valley and other centers of innovation. China currently has 1,731 universities and continues to build more universities and trade schools. In 2005, there were an estimated 3.4 million college graduates.[2] 

Lessons Learned from China’s Automotive Component Sector
• In capital intensive industries, government interventions such as preferential industrial and fiscal policies are needed to channel growth.
• Foreign direct investment is important in facilitating technology transfer and capital investments.
• Manufacturing sector requires good infrastructure such as transport system and power supply.
• Investment in tertiary education is vital in the promotion of hi-tech industries because human capital is the key in a firm’s expansion strategy.

Factors Leading to India’s Growth in Manufacturing

While there are certain similarities in India and China that encourage growth of the manufacturing sectors, there are key differences that can account for why China has been more successful in manufacturing than India. As mentioned in the section above, China has been successful in manufacturing because of preferential government policy, foreign investment, infrastructure investment, and human capital. Preferential government policy and human capital have also played a role in India’s recent growth in manufacturing, but other factors such as reliable suppliers, low cost of materials and labor, and a large domestic market have also contributed.

1. Preferential Government Policy

In order to encourage growth of the manufacturing sector the government has implemented reductions in import and customs duties. In the electronics sector the government has removed customs duty on raw materials and inputs for the manufacture of electronic components. In the automotive sector the government has reduced customs duties on raw materials and inputs for manufacture of automotive components by 20 – 15 percent (IBEF 2006). India has also developed Special Economic Zones (SEZ) that allowed for government, private or joint sector initiatives to develop business. The SEZs provide high quality infrastructure facilities and support services, besides allowing for the duty free import of capital goods and raw materials (IBEF 2006).

2.Human Capital

India has an abundance of skilled engineers and technical experts. The U.S. and Singapore are the only countries that outrank India in the availability of skilled-workforce. In addition, India’s employable skilled workforce is projected to grow for the next 20 years, but China’s skilled workforce started its decline in 2010. In 2003, India also had the lowest hourly labor costs among its major competitors at US$0.74. India’s competitors followed at the following rates: China US$0.90, Thailand US$1.20 and Mexico US$1.68 (IBEF 2006).[3] 

India has a well-developed technical and tertiary education infrastructure that produces over 500 PhDs, 200,000 engineers, 300,000 non-engineering postgraduates and 2,100,000 other graduates each year (IBEF 2006). Eight percent of the Indian population between the ages of 25 and 34 receives tertiary education compared to only 5% of the Chinese population in that same age cohort. High levels of education not only lead to engineering and technical capability, but also strong managerial capability.

3. Large Domestic Markets

India’s rising incomes and growing consumerism are the main factors aside from lower costs that make India appealing to foreign investment. As income rises, there is also an increase in domestic consumption. Between 2005 and 2006 domestic consumption was forecasted to increase by 8.7% (EIU 2006). While a large domestic market creates a good incentive for initial investment in India, companies need to realize that this is a limited source of growth and they need to be poised to export from India in order to truly expand.

4. Quality and Trade Standards

India’s adherence to quality and trade standards makes exporting from India a viable option. India manufacturing companies have quality management programs in place including ISO 14001, TS 16949 and TQM that make them export ready. Approximately 80 percent of automotive component manufacturers in India meet ISO 9000 quality standards. In addition they are WTO compliant for Trade Related Intellectual Property (TRIPS) (IBEF 2006). Companies who set-up operations from India need to take advantage of these opportunities to expand India’s manufacturing sector to serve international markets.

Factors Slowing India’s Growth in Manufacturing

1. Lower Levels of Foreign Investment than China

Since the beginning of the 1990s; India has improved its manufacturing environment. In the first half of the 1990’s, manufacturing exports grew 30% higher than the world export market, but during this time China’s exports grew at a rate of 57% higher than the world market. One main factor that contributed to China’s higher rates of growth was that during that time China averaged US$40 billion in foreign investment annually while India averaged foreign investment was only US$3 billion during the same period of time. 

Reasons For Receiving Lower Investment:

(i) According to the World Bank 2004 Doing Business in India report, it is harder to do business in India than China. One supporting example of this fact is that in 2004 it took 89 days to start a business in India, but it only took 41 days to start a business in China.

(ii) India also has stricter labour laws, which makes it much harder to hire and especially fire workers. This is also cited as an impediment to growth by businesses. Senior management at Indian firms also spends more time addressing regulatory issues than management of Chinese firms (11.9% in India vs. 7.8% in China) (World Bank 2004). The government officials in India responsible for overseeing various regulations, including labour and tax provisions, have more discretion over what rules and regulations they enforce. This leads to higher levels of corruption than other developing countries.

2. Lack of Infrastructure

 Infrastructure is often cited as the biggest impediment to growth of the manufacturing sector in India. Gains made through low labour costs are often lost through bottlenecks in power supply, telecommunication, and transportation.

Speedy completion of projects requires attention at the micro and at the policy levels. While every effort should be made to remove administrative bottlenecks, issues relating to the environment and land acquisition also need attention. The concerns relating to environment and land acquisition are genuine. They cannot be wished away. We need to work out an acceptable compromise between the compulsions of growth and the concerns relating to environment and land acquisition. A process of consensus building needs to be initiated.

As a result, the rapidly growing bilateral trade between the two neighbours is tilting heavily in China’s favour, at a rate that India has termed unsustainable. The quality of trade also goes against India. India exports raw materials such as iron ore but imports manufactured goods. A fallout of which is dumping of products on big markets like India.  To protect domestic manufacturers, India has been imposing an anti-dumping duty on 159 products — ranging from chemicals, petrochemicals, pharmaceutical, steel, fibres and consumer goods — imported from China since 1992.The spurt in factory imports from China has coincided with a sharp slide in India’s manufacturing sector despite the UPA government’s efforts to push the sector. Manufacturing output grew barely 1 per cent in 2012-13. In 2013-14, factory output contracted (-) 0.7 per cent. The share of the jobs-creating sector in the GDP has declined to 14.9 per cent in 2013-14 from the peak level of 16.2 per cent in 2009-10.

Recommendations for India’s Manufacturing Sector Given China’s Success

Recommendation 1: Increase FDI Inflows

Higher FDI will allow India to further develop its infrastructure, which will lead to business development. To increase FDI, India needs to further liberalize FDI regulation. The one cultural factor that makes that more difficult for India than China is Indian nationalism. Certain government parties are resistant to multinational investment in India. Unless there is an acceptance in the role foreign investment can play in making India stronger, this will continue to be a hurdle. Another main factor in increasing FDI flows in making it easier to enter and exit the Indian market. Until these factors are addressed foreign companies will continue to choose other destinations for their investment like China, Brazil, or Malaysia.

Recommendation 2: Improve Infrastructure

Making a serious investment infrastructure will help business grow and attract more investment to India as well. While the Indian government is taking some steps towards developing infrastructure through the Special Economic Zones, in order to truly be competitive they need to allow for better access to power supply and transportation. Following China’s example of developing preferential treatment for access to power supply and transportation would lead to more investment in manufacturing.

Reforms must be part of a continuing agenda. The basic principle guiding reforms must be to create a competitive environment with a stress on efficiency.

What industrialists have to say:

 Havells is one of several Indian companies to have shifted production or sourcing from China, as costs climb in the Middle Kingdom. Consumer appliances company Godrej, mobile-phone maker Micromax, auto-parts maker Bosch and stationery manufacturer ITC have all started expanding or exploring manufacturing operations in India. Chinese companies, too, are forming joint ventures with Indian partners to set up production bases in the country. Business Today spoke to 16 companies that have already shifted part of their production from China to India and a few more which said they were considering a similar move to take advantage of lower Indian labour costs and favourable currency movements. "Chinese costs are going up. This is a great time to move production from China to India," says Adi Godrej, Chairman of the Godrej Group, which has shifted air conditioner and washing machine production to India. He thinks the trend will continue for 20 years. "The earlier India leverages this trend, the better off we will be. If we don't leverage it soon, other countries will do it better." Other countries, in fact, are already benefiting as China begins to lose the competitive advantage that lured companies from across the world. An estimated 100 million jobs will move out of China over the next few years in labour-intensive sectors, says Ajay Shankar, Member Secretary of India's National Manufacturing Competitiveness Council. Many US, European and Japanese companies are shifting production from China to lower-cost locations such as Southeast Asia. A boom in shale gas output in the US has prompted many companies to move production back to America.

But the point which needs keeping in mind is the continued economic weakness in Europe and shift away from consumer-led growth in the US further complicating the export ambitions of emerging economies. It will be much more difficult and challenging for India to grow its manufacturing sector by relying exclusively on exports, the way China did. India might have to develop its own growth model, using a mix of manufacturing for exports as well as the domestic market. Through greater foreign direct investment, India can build upon on what is already a significant manufacturing footprint in many industries.

Infrastructure and regulatory obstacles aside, India features nearly all of the key ingredients necessary to transform its economy into a manufacturing juggernaut: a demographic dividend, attractive domestic market, comparative advantage in shipping and labour costs, an inexpensive currency relative to the dollar, and low political risk. In many ways the coming decade will be crucial for India as growth is the answer to many of its socio-economic problems.