India – The New Manufacturing Powerhouse?

By Jan S. Rothman

What does India need to do to attract manufacturing and enable its economy to achieve success similar to China’s? Since 1978, China has become the world’s second largest economy, driven by manufacturing.  In 2015, China’s GDP was five times as much as India’s, but in that year, India’s GDP grew at a rate in excess of 7% while China’s decelerated at a similar rate.  India’s government seeks to grow its economy by 6.5% to 7% annually.

However, India faces a number of problems that must be overcome before it can sustain this level of growth. Many key issues in India are handled by state government rather than at the national level, which makes it more cumbersome to effect change.  In contrast, China propagates change from its central government.

India’s infrastructure also needs to be revitalized; the nation suffers from poor roads and highways, ports, rails, and airports – all key elements in the delivery of manufactured goods. It has been estimated that India needs $1 trillion of improvement to its infrastructure.  Additionally, its energy sources, particularly electricity and water, are unreliable, creating a difficult environment for manufacturing.  Also problematic is the high rate of corruption. According to an article in Global Times, “corruption is highly prevalent from top to bottom in every single government department.”

India’s education system could also potentially hold the country back. According to an article by A. Gary Schilling in Bloomberg View, “Opening the economy to entrepreneurs remains a long-run challenge for India, as does the education of hundreds of millions of students.  About 90 percent of children enter school but more than half drop out before completing high school.  Cheating on tests and bribing teachers for passing grades is rampant.”  Any fix to India’s education will require the training of between one and two million new teachers.

Manufacturing is a capital intensive endeavor, and India’s ability to attract foreign investment is another important element affecting the country’s economic growth. During the era following World War II, most manufacturing and industry was nationalized.  Most businesses were required to obtain licenses from the government prior to commencing operations or expanding existing facilities.  The government also imposed import tariffs in an attempt to encourage domestic production.  Foreign investment diminished and manufacturing waned during that era – a time when the economies of Japan, South Korea, and China grew at a rapid pace.

The “economic liberalization policies of 1991 led to an increasing role for the private sector and opened the economy to foreign investment” according to an article in The Globalist. India’s Prime Minister Narendra Modi and his government have attempted to open more sectors to foreign investment and make doing business less cumbersome, according to Anja Manuel in Fortune.  Manuel continues “…companies can now obtain many licenses and permits online, making the process faster and less susceptible to corruption.”  William Pesek, writing in Barron’s, points out that Modi’s “government needs a multi-pronged policy to attract more foreign direct investment, increase training, direct rural labor trends toward industry, capitalize on India’s low-cost labor advantage without exploiting workers and develop the domestic consumer market (which means spreading the benefits of 7.5% growth to India’s masses.)”

While much of this article has focused on the barriers to growth in India’s manufacturing sector, there is one advantage that the country possesses – its young, growing population. More than 31% of India’s 1.2 billion people are under the age of 15.  The challenge that the nation faces is to provide sufficient employment opportunities for this segment of the population.  Hopefully, those opportunities will be in manufacturing – as problems are resolved, the country can emerge as the next global hub.