India must tackle manufacturing malaise; Weak industry is the greatest challenge facing India

February 18, 2014 9:17 am

India must tackle manufacturing malaise

By James Crabtree

Weak industry is the greatest challenge facing India

The world’s largest carmakers gathered for New Delhi’s auto expo earlier this month, as the likes of Ford and Volkswagenparaded their latest wares. But the gathering showcased another and sadly rather rarer phenomenon: an Indian manufacturing success story.

Facing weakening demand at home, India’s car groups have transformed their sector into a global export hub in recent years. Companies such as Hyundai of South Korea and Nissan of Japan now ship vehicles made in India not just elsewhere in Asia and Africa, but increasingly to Europe and North America.

This should be celebrated. It proves that India can build world class facilities and win a greater share of global markets. But it presents a conundrum too: why have so few other sectors followed suit?

Persistently weak manufacturing is the greatest challenge facing Asia’s third-largest economy and one its political leader shows few signs of solving. It is a crisis implicitly acknowledged on Monday, as India’s government revealed minor duty reductions for the automotive and capital goods sectors. These were welcomed by battered industrial groups, but will have a trivial impact on the country’s broader structural problems.

Put simply, as China’s labour market becomes more expensive, India’s vast, inexpensive workforce and sizeable domestic market should see it becoming the world’s next industrial powerhouse. Instead, manufacturing has held steady at about 15 per cent of national output for a generation or more.

No developing economy has ever grown rich with such a miserly manufacturing economy. The last year has been especially disappointing: industrial output has shrunk, while exporters have responded anaemically to sharp depreciations in the rupee.

The picture is not all bad, of course. India does well in sectors involving specialist engineering, such as automotive components. Global companies flock to India to set up high-end outposts as well: Bosch of Germany, for instance, this month said it would build a $200m lab in Bangalore to research the “internet of things” and other such exotic topics.

But such niche facilities do little for the roughly 240m Indians who will enter the workforce by 2030 – an unparalleled demographic opportunity that, on the country’s current course, is worryingly likely to become a uniquely Indian disaster of joblessness and youthful anger.

India does not require a manufacturing miracle. But it urgently needs precisely the type of normal, large-scale manufacturing economy that provided the bedrock of growth in every other emerging Asian economy

A substantial increase in large-scale manufacturing in industries such as electronics, garmenting and food processing is the only realistic option to prevent this happening. Yet these are precisely the sort of relatively low-skill enterprises that India seems least able to create.

The scale of this crisis is underlined by research from consultants McKinsey, which describes India as suffering from “a glut of sub-scale, low productivity” industrial enterprises.

Only 11 per cent of those who work in Indian manufacturing do so in businesses with 200 or more employees, compared with 29 per cent in Indonesia and more than half in China. The country’s manufacturers suffer dismally low productivity, too.

The reasons for this are hardly a secret. Industry is mired in red tape. Hiring is arduous. Finding land is a trial. Power cuts are frequent. Manufacturers also get clobbered by unreasonable tax demands, as Nokia of Finland, which operates its largest factory in India, has recently discovered.

“You hear these frustrations all the time,” says Gopal Srinivasan of the TVS group, a conglomerate based in the southern city of Chennai, one of the country’s most important manufacturing hubs. “The trucks are late because the roads are bad. The factory is shut because power failed. Goods didn’t clear the port in time. You can’t get a licence. You have to pay this bribe and that bribe. It’s all a bit of a disaster.”

McKinsey outlines half a dozen sensible remedial measures to improve matters, from reforming land and labour laws to reducing arcane inspections and rationalising the tax system.

Carmakers have managed to get around some of these problems even without this. But their industry is not especially labour intensive, while large factories for global auto brands bring cachet, meaning politicians make greater efforts to help. Yet this only highlights the grim situation faced by other industries, who receive scant support and face innumerable barriers.

Demolishing those obstacles is the most urgent economic task facing whoever emerges as prime minister after national elections in May. India does not require a manufacturing miracle. But it urgently needs precisely the type of normal, large-scale manufacturing economy that provided the bedrock of growth in every other emerging Asian economy.

And without it, India’s next five years of growth will be just as disappointing as the previous.