 "Ishan Bakshi: The manufacturing conundrum")
Countries across the world are de-industrialising at much lower levels of development. And India is no exception. While successive governments have tried to arrest the decline in manufacturing, success has so far been elusive. But can the National Democratic Alliance's ambitious Make in India initiative succeed where others have failed? Can India reverse the decline in manufacturing? And if it does succeed, will it generate enough jobs to pull out millions of those currently employed in low productive jobs in agriculture?
With wages in China steadily rising and the Boston Consulting Group's estimates that the hourly cost of manufacturing in India is 92 cents, while in China it is $3.52, many argue that India should focus on building its manufacturing capabilities in labour-intensive industries, especially those that are likely to be vacated by China.
But this is a highly simplistic assessment. The reality is much more complicated. Despite rising labour costs, China isn't really easing its grip on low-end labour-intensive manufacturing. Take for example, the highly labour-intensive garments sector, which would be a logical choice for India to expand production in. According to The Economist, China's share of global clothing exports has actually risen from 42.6 per cent in 2011 to 43.1 per cent in 2013. Hardly a sign of vacating territory.
Further, whatever labour cost advantage that India offers, it is offset by its creaking infrastructure. While the wage differential between the two countries may rise, the world-class infrastructure that China offers ensures that its advantages are likely to endure.
Whatever low-cost manufacturing that is moving out of China is shifting to South Asian economies such as Vietnam and Indonesia. Cost considerations underline this shift. It is cheaper to have manufacturing facilities in the neighbouring Asian countries, as transportation costs to China are bound to be lower.
India's advantage is that it is one of the few countries that offers a big market. That should be the starting point. An industrial policy focused on nurturing industries that cater to the domestic market would be the best bet to build a manufacturing base. "A Make for India strategy would be more appropriate given that global demand is likely to remain sluggish," says Santosh Mehrotra, professor at Jawaharlal Nehru University. Apple said to be shifting focus to India and news that Foxconn is planning an aggressive expansion in India certainly do play into this domestic market-oriented strategy.
But one fears that the Foxconn unit may end up being another assembling plant, focused on low-end work. As most of its suppliers are scattered across South Asia, the parts that go into making the iPhone are likely to be shipped from outside. In which case the value added in India would be minuscule.
The real challenge is to nurture the entire ecosystem of suppliers. Creating a manufacturing hub means that in addition to Foxconn, its suppliers also shift their manufacturing base to India. Unless that ecosystem is created, forget dislodging, merely taking a small share of global manufacturing away from China will remain a pipe dream.
If such a strategy, were to succeed, would it create jobs for millions of those currently trapped in low productive jobs in agriculture? If the Asian experience is any guide, manufacturing has been a big source of jobs. But recent trends in India suggest that the relationship between manufacturing and job creation may have weakened considerably. Between 2004-05 and 2009-10, employment in manufacturing actually fell by around 5 million. Gujarat was the only big manufacturing state where employment in manufacturing grew during the period.
The fundamental question is whether this trend can be reversed.
It seems unlikely. The emerging reality is that production in both labour- and capital-intensive industries, even in developing economies, is increasingly becoming automated.
Last year the number of industrial robots sold increased by 56 per cent, according to the International Federation of Robotics. What is surprising is that in large part this boom was driven by new production facilities in emerging markets, especially in auto-making countries. Demand for industrial robots was also robust in the consumer electronics and communication equipment segments.
This suggests that even in a developing, labour-abundant economy like India, manufacturing will increasingly become capital-intensive. The Ford factory in Sanand encapsulates the job conundrum best.
Does this mean the jobs bonanza is unlikely to materialise? Not exactly. While a turnaround in manufacturing may not necessarily lead to greater jobs in the sector, it is likely to have an indirect effect through the creation of jobs in sectors that will support manufacturing.
While Ford's factory may employ fewer workers because of increased automation, think of the entire supply chain that will require a host of semi-skilled and skilled employees in sectors such as transportation, distribution, warehousing and customer service. Thus the indirect employment multiplier is likely to be of a much higher magnitude, as more jobs are likely to be created in the services sector than in manufacturing. "It is called the engine of growth because like the engine it doesn't carry passengers but it pulls the system along," says Pronab Sen, chairman, National Statistical Commission.
As a side note, even if the shift towards manufacturing and services does take place, agriculture will continue to account for a significant portion of the labour force in the foreseeable future. Even after the famed labour force migration in China towards manufacturing, agriculture continues to account for roughly 35 per cent of the labour force.
The Long View is an occasional series that analyses different scenarios
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
