Despite the many efforts of the first two Modi governments, manufacturing’s share has refused to budge over 17 per cent, mostly staying stuck at 14-15 per cent. Made in India and Atmanirbhar Bharat have not made much of a difference in the larger scheme of things in making India a powerful manufacturing-led economy. Nor is Modi alone in failing to make the manufacturing sector a bigger part of the economy.
His predecessors – Manmohan Singh as well as AB Vajpayee – too tried their best. The goal of manufacturing becoming 25 per cent of the Indian economy has been the goal of successive governments for several decades now. But the share of manufacturing has never crossed 20 per cent for the past few decades, mostly hovering around 18 per cent or lower.
In fact, since economic liberalisation, most governments have hoped to make India a manufacturing powerhouse – and several have laid out the red carpet to get global manufacturers to invest in India. But though splashy announcements of global investors have been made from time to time, the fact remains that many global manufacturing giants have come, taken a hard look, and then chosen other destinations – from Vietnam to Korea – to set up their plants.
Others who have actually invested in India – especially the automobile giants – have had a mixed experience. While Hyundai of Korea, for example, has been a huge success, the automakers from the US – Ford and General Motors – went out of the country even after investing billions of dollars and launching multiple models. In the luxury car segment, Germans like Mercedes, BMW, and Audi, hold sway but in the other segments, European models like Volkswagen, Škoda, and Renault or Citroën have failed to make a big mark.
In other sectors too, India has had mixed results. The Productivity Linked Incentives in India are considered particularly successful in one specific area – electronics assembly, especially mobile phone assembly. It is often touted as a great manufacturing (and export) success story of the past half-decade.
The problem though, is that India has made a mark only at the relatively low-value-added assembly of handsets and imports much of the more value-added parts from China, or Taiwan, and others before assembling them in the country. It also has, so far, failed to be as competitive in putting together the handsets as China and Vietnam have been. Indian-made iPhones, despite the PLI given by the government, cost more than iPhones made elsewhere.
Three questions are important for India. First, why is increasing the share of manufacturing so important for policymakers when services have been the primary driver of growth for the Indian economy over the last three and a half decades? Two, what has ailed Indian manufacturing and why hasn’t it become another China? And, finally, can India become a manufacturing powerhouse going forward?
The first question has been the subject of much debate lately. Many respected economists feel that the way forward for India on its journey to developed-country status has to integrate manufacturing at its core. Services alone will not do the trick. Other equally respected economic thinkers – Raghuram Rajan, for instance – have argued that if services have grown so fast, and with relatively little support from the government, maybe we do not need to replicate the experiences of China, or the Asian Tigers, or Japan. If we are capable of becoming the fifth-largest economy in the world with services as the biggest driver, we can grow fast even in the future, keeping services at the core. After all, in the conventional developing to developed journey, it is assumed that countries will first move from agriculture to industry/manufacturing – and then after reaching a certain stage, will move towards services. The most developed countries in the world now are predominantly services economies, with manufacturing playing a relatively small role.
However, manufacturing can’t be ignored. So, what ails Indian manufacturing, and why hasn’t it become the powerhouse that multiple Indian governments have tried hard to make? Certainly, many ideas have been tried out. Special Economic Zones (SEZs), with their own rules to create an ecosystem that would grow without too many bureaucratic pressures and easier regulations, were once supposed to do the same thing that China’s enormous industrial enclaves did.
They did not quite succeed for multiple reasons. Among other things, there were over 370 SEZs in India of varying sizes and none of them came close to the size of Chinese economic zones like Shenzhen. Other reasons included irrational and ill-thought-out policies, logistic issues, and local regulations.
In general, manufacturing investors in India have found that despite cheaper labour and a vast potential market, the ease and cost of doing business in India are often higher than in some other destinations. Delays and hurdles in acquiring property, higher power prices, low productivity of workers, and local regulations at the district level are only some of the things that manufacturers need to deal with. Other issues that businessmen talk about in private include higher logistics costs, and inefficiencies at multiple levels, as well as higher taxes on imported inputs. Corruption at lower levels and other issues have been mentioned by manufacturers from time to time. Changes in import duties that often make input costs higher than in other countries have been a complaint. The size of the domestic market has also flattered to deceive. The middle class that was expected to become a huge proportion of the population has turned out to be relatively small – and with limited purchasing power compared to, say, China.
Successive governments have tried to neutralise these problems by offering incentives – but many global manufacturing companies have found India to be less attractive to operate plants in than many other options. The Apple iPhone manufacturing in India is often quoted as a success of the second Modi government’s Productivity Linked Incentive Scheme. But reports suggest that the production cost of iPhone assembly in India is still higher than that in other countries. (iPhone prices in India are also higher than in several other countries, including in the US and Dubai.)
Part of the problem here is that while iPhones are assembled in India, most of their components are still sourced from China or other countries. The level of local components is relatively small, though it is expected to go up slowly over time. When you import most of your components, and only do the final assembly in India, you need to pay for the logistics costs as well as the higher import duties. That apart, labour productivity in India often lags behind that in China and Vietnam.
Still, there is hope that India is likely to get more competitive in manufacturing over time. While PLI is not the best incentive – it involves the government offering incentives if a company can increase production over a certain limit and is, therefore, more about production quantities than the inherent cost competitiveness of operations – there are other ways in which the government is trying to help in this area. For example, the focus on getting more electronic chip manufacturers into the country is a long-term play that can reduce the cost of inputs for Indian manufacturers a decade from now.
Excerpted with permission from Will India Get Rich Before It Turns 100?: A Reality Check, Prosenjit Datta, Aleph Book Company.
