Stepping up India’s manufacturing

by Dave

In LatAm, Indian manufactured products in 2 wheelers, plastcis, low-end engineering products are not cost-competitive with their Chinese counterparts. Again, unlike Chinese offerings, Indian manufactures don’t benefit from any government subsidy – instead have to bear higher costs in power, cost of capital etc.

No large developed currently got to be that way without building a strong manufacturing sector.
Zorawar Daulet Singh in Business Standard

Why does India’s manufacturing sector lag its peers? Manufacturing, especially in labour-intensive sectors, is underpinned by fundamental prerequisites that apply to most successful manufacturing locations: a basic literacy in the workforce upon which further skills can be imparted, physical infrastructure (i.e. power, roads, railways and access to ports), access to financial capital and, crucially, policies that encourage the allocation of resources towards export-oriented manufacturing. Since all these structural attributes are absent in India’s case, it does not receive the amount and type of investment that the rest of Asia has witnessed over the decades.

India’s services sector, in contrast, has performed relatively better because it had access to the nation’s small pool of qualified workers and did not require too much physical infrastructure. Thus, while India’s share of services in overall gross domestic product (GDP) has increased from 37 to 49 per cent in the last two decades, the share of manufacturing has remained at 16 per cent. In contrast, the share of China’s manufacturing sector to its GDP is 35 per cent; it is 30 per cent for South Korea, Malaysia and Indonesia; even Argentina and Brazil’s manufacturing sectors contribute 24 per cent to their national economies.

Services inherently require a skilled workforce and, therefore, cannot absorb the majority of the “youth bulge”, thus, laying the burden of job creation upon the manufacturing sector. This developmental pattern has historical precedence: the rise of the European great powers, America at the turn of nineteenth century, Russia in the first half of the twentieth century, East Asian tigers after the 1960s, Japan in the 1980s, and China in recent times. All these economies demonstrated manufacturing growth that restructured the erstwhile agrarian polity.

China’s manufacturing juggernaut is buttressed by massive implicit
subsidies in the Chinese economic system that have lowered the
opportunity cost of the major factors of production — the value of the
yuan, financial capital, electricity, transport infrastructure, natural
resource use and labour costs. Competing with such a system requires a
combination of superior innovation, strong public policy support for
labour-intensive manufacturing sectors and a commitment to address
India’s infrastructure woes.

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