For India to develop, it needs to get more into manufacturing. This WSJ story on Tata Motors shows what Indian companies are capable of and should be doing:
MG Rover Group Ltd. is aiming to import 20,000 cars a year from India’s Tata conglomerate, a century-old industrial empire. The deal illuminates an arresting change in the world’s second-most-populous country. Its vast manufacturing sector, long sluggish and inefficient, is becoming a new global force. By seizing upon economic reforms and tapping the country’s cheap labor and engineering talent, top manufacturers are taking the nation’s economy beyond its well-known strengths in technology and back-office outsourcing.
India’s Ranbaxy Laboratories Ltd. is becoming one of the generic-drug industry’s fastest-growing players. An Indian auto-parts company, Bharat Forge Ltd., gobbled up a German firm to become the world’s second-largest forging concern. The Tata group’s own Tata Iron & Steel Co. has become one of the world’s lowest-cost producers, selling specialty steel to Toyota Motor Corp., Hyundai Motor Co. and other multinationals.
Mr. Ratan Tata and his team put engineers at all levels to work on designing the small passenger car that would become the Indica. (The name combines “India” and “Car.”) One team designed the Indica’s parts. Another division developed the conveyors for the assembly line. Yet another group built the machines to stamp the parts, and another churned out the software.
Tata Motors developed the Indica for $350 million. An equivalent project in the U.S. or Europe would have cost at least three times as much, says V. Sumantran, a 16-year veteran of General Motors Corp., who now heads Tata Motors’ car business. A good part of the savings are in salaries. Indian engineers typically earn a small fraction of the pay that their counterparts in the U.S. do.
In 2002, Tata Motors found an eager buyer for the Indica in MG Rover, which was seeking to add a small car to its stable of vehicles. MG Rover looked first in China but signed a deal on the Indica because of its low cost and high quality, according to an official from Rover’s parent company.
When one looks at outsourced services, the real benefit goes to be outsourcer, who saves 50-70% on costs. The benefit on the local (Indian) economy is marginal. This is not the same as in manufacturing. What India needs is more of FDI (foreign direct investment) which goes into creating assets on the ground, and benefits a much bigger section of the community.