3 megatrends that give India a chance to become the world's next factory

Convergence of external and internal elements affords country a lifetime opportunity, writes Mayank Dhaundiyal

By Mayank Dhaundiyal

There has been quite a buzz about Foxconn Technology Group's plans to invest around $700 million in India to locally manufacture iPhone parts, especially given that Apple's shipments of 'Made in India' smartphones in 2022 increased by an impressive 162 per cent in value compared to the previous year. According to media reports, India is also in talks with international aircraft makers like Russia's Sukhoi and Brazil's Embraer for forming a partnership to manufacture smaller planes that will help connect towns by air. The recently concluded global investors’ summit in Uttar Pradesh, with investment proposals worth Rs 33.5 trillion, and Andhra Pradesh, with investment proposals worth Rs 13 trillion, was also covered with a lot of fanfare. While these are positive developments and India would do well to actively seek these prospects, the country needs to do much more to become the next global factory after China.

This is because according to the Indian government’s recent annual periodic labour force survey, the proportion of jobs in the manufacturing sector has actually decreased from 12.1 per cent in 2018–19 to 11.6 per cent in 2021–22, while the proportion of jobs in the agriculture sector has increased from 42.5 per cent in 2018–19 to 45.5 per cent in 2021–22. This trend is problematic for a country hoping to increase the size of its economy and provide quality jobs to a young population. As a labour-intensive industry that provides long-term, high-quality employment to the local community, manufacturing contributes significantly to job creation. In fact, the manufacturing sector has been a key part of the economic growth of all top economies, including the US, Japan, China, and Germany. Having specialised manufacturing capabilities, particularly in industries such as pharmaceuticals, aircraft, defence, and information technology, also lends a country geopolitical heft, as was seen during the Covid-19 pandemic and the recent Russia-Ukraine crisis. India is now not only perhaps the most populous country, but it also has the world's largest working-age population, given its excellent demographic dividend. In order to prevent the demographic dividend from becoming a demographic nightmare, the country must provide good opportunities for its vast young workforce.

According to 2019 figures by the United Nations Statistics Division, China had by far the largest share of the global manufacturing output, at around 29 per cent. In comparison, the USA accounted for around 17 per cent of global industrial production, putting it in second place. India contributed a measly 3 per cent of the world's manufacturing output, which is only about 10 per cent of China's! India has about the same number of people as China, but its economy is only about a fifth as big as China's. India needs to catch up quickly if it wants to reach its short-term and long-term strategic goals. Countries, like the US and China, have used economic power to achieve their geostrategic goals. India must rapidly expand its economy, not just to provide its large and growing population with better opportunities, but also to advance its national and international strategic objectives. Here, the manufacturing industry can play a crucial role.

China's manufacturing sector has been a crucial engine of its economic growth. According to figures from the World Bank and OECD national accounts, the percentage share of China’s manufacturing sector has hovered around 30 per cent for the last two decades, contributing almost $5 trillion (in current US dollars) in 2021. China's per capita GDP increased from a paltry $300 in 1990 to a respectable $12,500 in 2021, partly due to the manufacturing sector's exponential expansion, making China the second-largest economy in the world in the process. The same story had played out before in Japan, the third largest economy and the third largest manufacturer in the world. Japan’s manufacturing sector has been a key driver of the country's economic growth and has played a significant role in helping the country increase its GDP from $1.5 trillion in 1990 to approximately $5 trillion by 2021. The manufacturing sector has also played a crucial role in boosting Japan's per capita income. According to the figures from the World Bank, Japan's per capita GDP increased from approximately $25,000 in 1990 to over $40,000 in 2021.

India needs to learn from these transformational stories and go through a similar trajectory. India's meagre per capita GDP of $2200 is way below that of the USA ($70,000), Japan ($40,000), and even China ($12,500). India must aggressively and strategically invest in its manufacturing infrastructure and ramp up its manufacturing capacity, making it one of the key drivers of its economic growth.

The good news is that, as a result of three megatrends, India has an outstanding opportunity to become a manufacturing powerhouse. The sheer magnitude of India's demographic dividend is unrivalled on a global scale. India has by far the greatest population of young individuals of working age in a globe that is progressively ageing. India's young population is more than double that of the total population of the United States and about 100 million higher than the combined populations of the G7 nations. This demographic dividend is expected to continue for another two decades. Several Asian economies, including Japan, China, and South Korea, were able to successfully capitalise on this demographic dividend and transform their economies. India must do the same.

The second megatrend is that countries and organisations are looking to decrease their dependency on China for manufacturing. Covid-19, a militarily aggressive China with expansionist goals, and the resulting geopolitical tensions with many countries have made it clear that many countries and organisations need to rethink their plans to outsource manufacturing to China and reduce their political and supply-chain risks. Additionally, China's growing middle class is demanding higher wages and better working conditions. As labour and other related costs rise in China, reducing its manufacturing competitiveness, many companies have started to look to other destinations, such as Vietnam and India, for manufacturing opportunities. India must capitalise on this trend.

The third megatrend is the decline in China’s growth rate. The current expected economic growth rate of China, as per official estimates, is 5 per cent and is widely expected to drop to 3 per cent by 2028. While after decades of double-digit growth, some decline in economic growth rate is to be expected, in China’s case this could be problematic, as it seems to be growing old before getting rich.

This convergence of external and internal elements affords India an once-in-a-lifetime opportunity. India, given its massive working-age population, competitive labour costs, and strong inclination of the federal and state governments to attract foreign investment given its potential electoral benefits, is perhaps the only country that can become a credible substitute for China as the world's next manufacturing powerhouse. With organisations around the world reimagining their global supply chains, this is a golden opportunity, and it is highly likely we will not get this window of opportunity again. India needs to act now and act decisively.

(The writer is the Dean of Jindal Global Business School (JGBS) at O P Jindal Global University. These are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the 'Business Standard' newspaper. )