Manufacturing in India

Bloomberg has an excellent article by Andy Mukherjee on how India needs to look beyond its knowledge industries and focus on getting its manufacturing sector to take-off if India has to “catapult itself from poverty to prosperity”:

For those who believe India will on the strength of its “knowledge” industries, here’s a sobering statistic: three-fourths of Indian workers, or 300 million people, don’t have high-school diplomas.

India’s educated elite is too small, and its purchasing power too limited, to lift the broader economy. What can really make India prosperous is something that will boost the incomes of workers who are stuck in low-productivity occupations — farmhands and housemaids — that pay the national average of $500 a year, or less.

And that something can only be manufacturing.

“The services sector, and in particular the knowledge-based industries, is unlikely to provide opportunities to the poorly educated sections of our society,” say Sanjay Jain and Uday Bhansali of the consulting firm Accenture India in a study titled “Making Indian Manufacturing Globally Competitive.”

Create more factory jobs, and India’s economic growth rate can easily accelerate to 10 percent a year, making it the fastest- growing major economy in the world, the authors argue.

It’s easier said, than done. There are many factors — high cost of credit, inflexible labor laws, expensive and unreliable electricity supply, and inefficient ports — that hamper Indian industry’s global competitiveness; although, by far the biggest problem with Indian manufacturing is its insularity.

Thanks to the blinkeredness left over from Soviet-style socialism of 1960s and 1970s, the Indian industry treats the local population, a large part of which earns subsistence wages, as the main source of demand for factory-made goods. Manufacturers go on producing large volumes of low-quality, low-margin products to turn a profit. Much of what they make, can’t be exported.

Where does one begin to break the vicious cycle? The surefire way is to “force” Indian manufacturers to tap global demand, so they’re able to expand operations, and create more and better-paying factory jobs. As more workers find employment in manufacturing industries, they’ll have the spending power to demand better goods and services.

In a chaotic democracy like India, how does one draw out local manufacturers and make them go global? The easiest way is to open more of the domestic consumer-goods market to overseas investors. Competitive pressures, thus unleashed, would ripple through the supply chain and force even small manufacturers to look beyond the local market.

The biggest assistance the Indian government can give local manufacturers is to open the floodgates of competition wider by slashing import tariffs…More than anything else, such a step would be in India’s own interest. Let the U.S. worry about saving white-collar jobs, creating more blue-collar jobs should be India’s immediate priority.

I will discuss this in more detail as part of my ongoing Tech Talk series “As India Develops.”

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Rajesh Jain

An Entrepreneur based in Mumbai, India.