Higher, and rising, labour productivity, in part due to better educated and trained labour force, and superior infrastructure explain China’s massive lead over India in manufacturing. Indian industry is still nowhere near being able to challenge China, says a study conducted by The Boston Consulting Group (BSG) for the Confederation of Indian Industry (CII).
The study, to be released later this month by commerce and industry minister Anand Sharma, says if India can sustain a manufacturing GDP growth of 11 per cent annually over the next decade, it would emerge the world’s fourth largest manufacturing economy, next to China, the US and Japan, in that order. This growth will generate employment of 50-90 million by 2025, or around a third of the incremental employment in the period.
CII-BCG chose to use the 11 per cent figure even though the last decade’s average for manufacturing GDP is 6.8 per cent since, in the past, India has clocked growth rates of close to this on various occasions in the past (see graphic), though never on a sustained basis. The latest monthly manufacturing GDP growth is also once again back to the 11-12 per cent level (for April-November, however, growth is still 7.6 per cent).
Getting to the magic growth, however, will require massive increase in investment in infrastructure, in labour force skills and manufacturing capacity. The study says India needs a four- to five-fold hike in investment levels over the next five years, so as to rise to Rs 55-80 lakh crore by 2025.
Which means India’s track record in converting investment plans to reality will have to go up manifold – in states like Orissa which have the largest share of investment plans, this ratio is around 12-13 per cent. Exports growth, similarly, will have to rise to around 15-20 per cent, up from around 11 per cent in the last decade.
For corporate India this means there will have to be a 3-4 fold increase in the number of companies that have a turnover of over $1 billion (Rs 4,670 crore) — from 25 today to around 80 in 2025. At least three to four firms will need to have a turnover over $100 billion.
Indian industry also lacks the strategic depth that, for instance, China has with the scale its industry has and the global leadership position it has acquired in various industry disciplines. In just the last five years, CII-BCG point out, while India’s GDP has around doubled, net imports of telecom equipment have risen 3.5 times and net imports of industrial machinery/equipment have risen 7.5 times. While many would argue India doesn’t need to have leadership positions in each sector, according to CII-BCG, it needs to have this in several sectors if it is to take advantage of the increasing offshoring opportunity that is now available.
In 1991, for instance, of the total global industrial output of $6 trillion, around a fifth came from the Rapidly Developing Economies (RDEs) like China, India, Mexico and Brazil. By 2008, this was up to 36 per cent of the total output of $13.5 trillion; by 2025, according to CII-BCG, total industrial output will rise to $35 trillion, of which around 55 per cent will be located in the RDEs. Grabbing a reasonable share of this increasing RDE share is the path to achieving a 10-11 per cent sustainable manufacturing GDP growth.
This requires India to strengthen its education base (in just the next five years. CII-BCG estimate a shortfall of 600,000 engineers and 3.9 million graduates), simplifying government rules and procedures (such that India moves up from being 120th out of 127 countries when it comes to ease of doing business); increase R&D spend (0.8 per cent of GDP in India vs 1.2 per cent in China) and improve plant productivity (‘lean’ productivity practices can drive down process cycle times by 30-50 per cent and improve labour productivity by a fifth). CII’s cluster development work is trying to achieve just this, but it needs to be scaled up considerably.