Can India revive its manufacturing sector and create millions of jobs?

India needs nuanced policies, investment, and scale to unlock its manufacturing potential, writes Ajay Shankar

Manufacturing success has been eluding India, though we were an early starter. We had a globally competitive textile industry by the end of the 19th century. The first Tata steel plant came up in 1912. After independence, we thought we could jump ahead and create a capital goods industry. By 1960, we were making cars while Korea had yet to begin industrialisation. In 1991, we were more or less at par with China. Our reforms were expected to give us faster industrial development. But industrial growth rates since then have not been better than in the 1980s. The Manufacturing Policy of 2011 sought to increase the share of industry in GDP to 25 per cent and create 100 million jobs. The share of industry in GDP has not grown as yet, nor have manufacturing jobs.

 

By 2000, our young IT software services industry had taken off and become globally competitive. It has continued to grow. This generated the sceptical view about manufacturing; our comparative advantage was in services, while China’s was in manufacturing. Sure enough, China has since become the ‘factory of the world’, eliminating poverty in the process. It now has a per capita income more than five times ours. Influential voices now urge that scarce resources and effort by the government should be focused on service exports in new areas and that we should reconcile ourselves to not succeeding in manufacturing for the global market. By implication, the Production Linked Incentive (PLI) scheme may not be the best use of scarce resources.

Given the size of our young population and the imperative need for creating better-paying productive jobs, we do not have the option of not trying to create millions of jobs in both manufacturing and services. But can we succeed in manufacturing, and if so, how? The answer needs a nuanced understanding and pragmatic action.

First, there is the comforting myth about comparative advantage. There is the presumption that we do not have skilled and efficient workers. The delay in moving towards full literacy and the poor quality of education strengthens this view. The facts are otherwise. The young Indian, with training, becomes as good as any in the world. India Gate is a testimony to how well Indian soldiers recruited from rural India and trained for just a few months to use modern weaponry performed against the Germans. This experience was repeated in World War II.

Efficient Indian firms and multinational corporations have been able to achieve productivity and quality levels to be globally competitive. Maruti achieved this in the 1980s for its entire supply chain. The author recalls his conversation with a German who came to India for the first time with the responsibility of setting up the Volkswagen manufacturing plant and was informed that the plant was completed a few months ahead of schedule and that he found Indian staff at all levels performing better than he expected.

The recent example of Apple dispels this myth about manufacturing and the Indian worker fully. It began its Indian operations in 2017 and now has 14 per cent of its global production in India. It plans to raise this to 25 per cent by 2025. It exports a quarter of its production. It has become the largest creator of manufacturing jobs in India; 150,000 direct and 300,000 indirect jobs.

If the productivity and quality of the output of the Indian worker are not the issue, then where is the problem? The PLI scheme has been the trigger that got Apple to bring production to India. Implicit in the PLI scheme is the acceptance that manufacturing in India has a cost disadvantage. Only if it is offset does manufacturing in India become viable. Apple has also shown that increasing scale and volumes for catering to the global market makes commercial sense. It has demonstrated that production for the world can take place in India.

Hopefully, Indian firms are learning the right lessons from the Apple example. Aiming for scale and increasing market share in the domestic and export markets at the same time makes commercial sense. This has been the core strategy of Korea and Taiwan earlier, and China more recently. They transformed themselves into advanced industrial economies. As firms start increasing production and supply to the domestic and export markets, they will need labour, creating direct and indirect jobs. Firms create jobs—not governments—to increase production for growth and higher profits.

Governments in Korea, Taiwan, and China ensured that their firms, succeeding in the export market, grew as fast as they could, with finance not being a constraint. The IT industry in their peak years had double-digit growth rates, but they did not need capital to grow. Manufacturing does. Returns are usually modest. Unless the state moves in and ensures the supply of capital to domestic firms succeeding in the export market by underwriting risk, their full growth potential would not be realised. The growth of the component supply chain, which gives depth to manufacturing, should also not be constrained due to difficulties in accessing capital. Many analysts agree that it was a mistake to do away with our domestic development financing institutions (DFI) in the nineties as a part of the reform process. There is a case for creating sector-specific DFIs.

Quantifying the cost disadvantage in an industry is the starting point, and then removing it is a necessary condition. Reversing an inverted duty structure is the obvious first step. Provision of cheap land with infrastructure and connectivity is the next. This is best done by the scale and patient capital that only a state agency can provide. This agency could, in turn, use private partners. Then, a sector-specific set of measures needs to be evolved in consultation with industry for the transition into a high growth trajectory.

We have a huge young population who are trainable and desperately need jobs. Their wages give us a substantial cost advantage. Technical and managerial resources are abundant. With the right measures, we could achieve our enormous potential.

(Ajay Shankar is Former Secretary, DIPP, Govt of India and Distinguished Fellow Institute for Studies in Industrial Development)
 

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