While manufacturing in India has remained healthy due to strong domestic demand, its contribution to GDP is only 16%, compared to 34% in China, and largely oriented to the domestic market.
How can India increase its manufacturing competitiveness while employing millions of new entrants into the workforce?
Key Points
• India’s manufacturing sector will be driven by a US$ 500 billion investment in infrastructure across sectors in the near term
• Innovation in manufacturing is crucial; India’s competitive edge is not only in labour arbitrage but in technologically intensive manufacturing
• Both a shortage of roads and power and a skills shortage pose challenges to the manufacturing sector
Synopsis
The manufacturing sector in India faces acute challenges. From problems with power, ports, railroads and roads to a shortage of human capital, manufacturing in India has long lagged behind targeted goals. But the Indian government's commitment to raise its investment in infrastructure from 7% to 9% represents a US$ 500 billion opportunity for growth within India's manufacturing sector.
A number of foreign manufacturers have met India’s infrastructure bottlenecks head on, with considerable success: LG has looked at India as an export hub; Hyundai has set up its small car manufacturing base in India; Nokia's handset manufacturing in the southern state of Tamil Nadu costs 12% less than its counterpart in China.
India offers potential investors in the manufacturing sector a number of competitive advantages. India's own domestic market is large, with over 600 million rural consumers. Workers’ wages in India are less than half of those in China. India has a large talent pool from which to draw, including a strong engineering ecosystem.
From a strategic point of view, growth in the coming decades will come from the developing world. India is in an excellent position to serve emerging economies in Latin America, Africa and elsewhere in Asia. Currently, that represents 11% of India's export market, but it is set to grow dramatically.
India's competitive advantage is in technology-intensive manufacturing. Indian manufacturers must lead by innovation, following the example of the Tata Nano, the world's most affordable car, which was designed from the bottom up.
One challenge facing Indian manufacturing at a time of tremendous growth is high turnover. When the economy grows at a rate beyond 7-8%, companies face a skills shortage and turnover increases from a manageable 2-3% to as much as 20-30%. This creates an unstable environment for manufacturing. The challenge can be mitigated by dramatically increasing the capacity of human resources.
Another challenge is public sector control and the requirement that companies bidding on very large infrastructure projects must have previous experience in the field, which many India companies lack. This results in Indian companies losing out in the competitive bidding process to foreign firms.
At the same time, state governments have been proactive in making manufacturing zones attractive to automobile and other manufacturers. The Indian government has identified areas where its intervention is required, such as social services, and infrastructure, where private industry is more capable.
Innovation in the modes and models of manufacturing can be a solution to the surplus of India's labour pool, which is largely unskilled but highly entrepreneurial. At the same time, core manufacturing capabilities are important for creating a first-world economy.
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