India: the next manufacturing giant?

The natural progression of economies for hundreds of years has been from agrarian to industrial and finally onto service economy. But India leapfrogged through the manufacturing phase and directly transitioned from agrarian to service economy. During FY19, the service sector contributed 54.77% to the gross value added of the country. On the other hand, the industry sector contributed 27.47% and the agriculture sector contributed 17.76%.[1]  

Chart, sunburst chart

Description automatically generated
Sourced: Statistica

Although the service sector contributes a lion’s share to the GDP, it only employs  32.04% of the Indian labour force.[2] This means that a large part of the country’s unskilled and semi-skilled workers has not been absorbed into the workforce. One reason for this could be the fact that service sector jobs and activities are heavily concentrated in cities as they require good infrastructure and a large population of an educated workforce.[3]  

To combat this asymmetry between unemployment and the growth in GDP from the booming service industry, India needs to develop a labour-intensive dimension of its economy – manufacturing. All countries that have wanted to develop have had to industrialise themselves. Industrialisation contributes heavily to the economic growth of a nation by building the infrastructure and boosting job creation, thus reducing poverty and ultimately enlarging the ‘middle class’ to drive consumption in the economy. [4] 

In line with this, India has been trying to strengthen its manufacturing sector in many ways. The launch of the PLI ( Production- Linked Incentive) scheme earlier this month serves to cushion the hard blows of steep tax rates, finance costs, power tariffs and land prices for manufacturers. It is expected to contribute towards production worth $250 billion in India in the next five years.[5] Other efforts such as reducing the compliance burdens, creating necessary infrastructure, and developing export hubs are also being undertaken by the government to boost manufacturing in the country. It looks like the early fruits of these efforts have started to appear as companies like Pegatron Corporation (manufacturers of Apple products) and Tesla are looking to set up manufacturing hubs in India. Pegatron Corporation is set to invest $150 million to manufacture and assemble iPhones at its new unit in Chennai. This will contribute to the electronics export in India and is expected to increase its total to $100 billion by 2025. [6]  

Apart from the PLI scheme, there is an array of reasons that make India an attractive country for manufacturing endeavours. Firstly, it has a large working- age population that is expected to increase to 65% of the total population in 2036.[7] Further, the cost of labour in India is half of that in China.[8]. This puts manufacturers at a competitive advantage compared to other countries with higher wage rates. Moreover, the establishment of manufacturing units in the country will also contribute towards India’s economic development. The country must currently create one million jobs per month over the next decade to tap into its human capital.[8] In this way, manufacturing in India is beneficial to the manufacturers as well as to the country’s economic development. Secondly, India is a politically stable country. This provides manufacturing companies a sound place to set up shop and run their operations. Manufacturing tends to be cost intensive and has a large investment turnover period. If there is political turmoil in the country, it would be difficult for manufacturers to simply pack up and re-locate to another country. So, the politically stable atmosphere of the country is another virtue.[9]  

Although India has set off on its course to becoming a manufacturing giant, there are areas that it can improve upon. Firstly, there is the stringent regulatory environment around FDIs. India ranks 62nd out of 70 countries in the Organisation for Economic Development’s FDI Regulatory Restrictiveness Index.[10This reflects poorly on foreign investors who will instead choose countries with easier regulations and lesser bureaucracy. Secondly, skilled manpower is in short supply. Despite India’s growing working age population, it lacks skilled workers. The vocational training programs in the country are out-of-touch with the latest technology, resulting in workers not being able to meet the requirements of manufacturers.[8] Inadequately trained workers hinder the progress of the manufacturing sector of the country. Further, there is a cultural disconnect between the working age population of India and their willingness to enter manual labour jobs. In his book ‘The Indian Renaissance’, Sanjeev Sanyal – the Principal Economic Adviser to the Ministry of Finance – notes that India may have difficulty in mass industrialisation because of the nature of India’s human capital.[11] People in the country hold intellectual labour in high regard while looking down upon manual labour. To become a manufacturing giant like China, there needs to be a change in the mindset of people so that more workers can be mobilised and employed in the manufacturing sector. In addition to this, heavy costs of logistics also persist in the country, which weigh heavily in the eyes of manufacturers looking to set up units in India.[8]  

With sufficient improvements in infrastructure, further easing of restrictions on multinational corporations and an improved vocational training program for its ever- growing population, India can become the next best avenue for manufacturing in the world. Though it may not follow exactly in China’s footsteps to achieve its goal, it can forge its own path ahead. As for now, the world waits to see what India can achieve with its potential.  

References  

[1] statistictimes.com 2021. ‘Sector wise GDP of India’. [online]. Available at: 

https://statisticstimes.com/economy/country/india-gdp-sectorwise.php > [Accessed on 9th April 2021]. 

[2] statista.com 2021. ‘Distribution of the workforce across economic sectors from 2010 to 2020’. [online]. Available at:  

https://www.statista.com/statistics/271320/distribution-of-the-workforce-across-economic-sectors-in-india/ >[Accessed on 9th April 2021].  

[3] economictimes.indiatimes.com 2011. ‘Services sector needs to absorb workers from hinterland’. [online] Available at:  

https://economictimes.indiatimes.com/opinion/et-commentary/services-sector-needs-to-absorb-workers-from-hinterland/articleshow/8884765.cms >[Accessed on 9th April 2021].  

[4] theguardian.com 2015. ‘Made in India? Why manufacturing is the best route to development’. [online]. Available at: https://www.theguardian.com/global-development/2015/jan/06/india-china-manufacturing-services-development > [Accessed on 09th April 2021].  

[5] thehindu.com 2021. ‘PLI scheme likely to boost India’s manufacturing output by $520 billion in 5 years’. [online]. Available at: https://www.thehindu.com/news/national/pli-scheme-likely-to-boost-indias-manufacturing-output-by-520-billion-in-5-years-pm-modi/article33995487.ece > [Accessed 10th April 2021].  

[6] deccanHerald.com 2021. ‘Apple supplier Pegatron to set up its first India manufacturing unit in Chennai’. [online]. Available at: https://www.deccanherald.com/business/apple-supplier-pegatron-to-set-up-its-first-india-manufacturing-unit-in-chennai-947058.html > [Accessed 10th April 2021].  

[7] timesofindia.indiatimes.com 2021. ‘By 2036, working- age population will rise, youth population drop’ [online]. Available at: https://timesofindia.indiatimes.com/india/by-2036-working-age-population-will-rise-youth-population-drop/articleshow/81132619.cms > [Accessed 11th April 2021].  

[8] southeast-europe.kearney.com. ‘Make in India: how manufacturing in India can become globally competitive’ [online]. Available at: https://www.southeast-europe.kearney.com/web/guest/industrial-goods-services/article/?/a/make-in-india-how-manufacturing-in-india-can-become-globally-competitive > [Accessed 11th April 2021].  

[9] managementstudyguide.com ‘The Rise of India as a manufacturing hub’[online]. Available at: https://www.managementstudyguide.com/rise-of-india-as-a-manufacturing-hub.htm > [Accessed 11th April 2021]. 

[10] data.oecd.org ‘FDI Restrictiveness’. [online]. Available at: https://data.oecd.org/fdi/fdi-restrictiveness.htm?mod=article_inline > [Accessed 11th April 2021].  

[11]thediplomat.com 2020. ‘How India will chart its own economic course’ [online]. Available at: https://thediplomat.com/2020/08/how-india-will-chart-its-own-economic-course/ >[Accessed 13th April 2021].