India has always been a competitive location for manufacturing — labour is cheap, engineering skills sufficiently available, power, where available, is reasonably priced, and manufacturing is of acceptable quality. And, this advantage has gotten even better over the last three years. Consider these facts:
- About 45 per cent of all Deming Awards – the Oscars for quality systems – awarded since 2000, have gone to Indian companies, 26 per cent to Japanese companies, 21 per cent to Thai and only two per cent to Chinese companies.
- At 16 per cent year-on-year growth, Chinese wages have inflated at twice the rate as Indian wages since 2008. Our average labour cost at $1.5 an hour for 2011 is much lower than China’s $2.5 an hour.
- The Indian rupee has become cheaper by 15 per cent relative to the Chinese yuan over the last three years, amplifying the labour cost shift.
Put in simple terms, an average Indian product, which was already competitive three years ago, is now about 20 per cent cheaper on a relative basis against a Chinese product — a serious fact for any developed market purchaser to note.
While this increased competitiveness somewhat helped our exports grow till last year (India’s share of manufactures in global trade was 1.6 per cent for 2011 as against one per cent in 2007), this year has seen us slipping behind again. Exports have de-grown for the past five months in a row, and early estimates seem to indicate that we could have lost 0.1-0.2 per cent share of global trade.
Why is this happening? There are many reasons, three of which are:
a) China has continually increased its export incentives over the last few years to compensate for loss of competitiveness. For example, in door locks, its export VAT (value added tax) rebate has nearly doubled (from five to nine per cent).
b) China is aggressively implementing counter-measures to compensate for wage inflation in the east. Its “Go-West” policy has been successful in parts in convincing companies to relocate to its interior.
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c) Most importantly, Indian infrastructural bottlenecks have intensified. For example, the low cost of power means nothing to an SME (small and medium enterprise) owner who runs his diesel genset for 16 hours a day.
This slippage in global position could not have come at a worse time. The World Trade Organisation predicts that global merchandise trade will continue to grow this year (albeit at 2.5 per cent) before bouncing back to the five-per cent range next year. Gaining 0.2 per cent share per year (we gained 0.3 per cent in our best years 2009 and 2011), could see us grow our manufactured exports by $100 billion over the next three years. Now, that is too big a prize to ignore, especially when China’s competitiveness is expected to continually decline.
What needs to be done to capture this $100-billion prize? Four things:
First, implement the National Manufacturing Policy in letter and spirit: Speed up approval, construction and launch of national investment manufacturing zones (NIMZs), and ensure they deliver what they were envisioned to — quality infrastructure, talent availability and labour flexibility. While nine NIMZs have been “approved”, there is a need for many more. Land availability among others, will continue to be a major challenge for NIMZs.
Second, address infrastructure issues, especially power shortage: It is unfair to expect the manufacturing economy to grow when the core ingredient – power – is unavailable. India needs to add more than 25-Gw generation capacity every year for 20 years to sustain its competitiveness. This should not be as tough as it is made out to be, given that India has over 150 years of coal reserves and surplus local manufacturing capacity for all key power equipment — including boilers.
Third, look for new sectors to grow in and drive a mission-mode approach to building competence in them: Textiles and clothing will only get us so far. And here, there is a clear need to think big and long term. Consider aerospace. Civil aircrafts alone contributed to $75 billion of US exports last year. Why can India not aspire to become a credible player in aerospace components or even in fully built aircraft?
Fourth, think intra-Asia, think Africa: Intra-Asia trade accounts for half of all exports from Asia, and is growing rapidly. Several Asian countries are growing steadily in consumption — Indonesia for one. Similarly, exports to Africa will grow at double-digit figures for the next decade. In both these economies, acceptance of India-made products is low. The government and the private sector need to work closely to build brand India and establish a cost-effective supply chain to these countries.
The stakes are high for us to get our act in exports together. Fail now, and we could see China surging again, or other countries such as Thailand beating us in the race to becoming an export powerhouse. The question as always is – will we do enough to seize this opportunity, or squander it again?
The author is Principal, The Boston Consulting Group, India. These views are personal