India’s Manufacturing Sector Facing Challenges

Back in 1951 India’s then prime minister Jawaharlal Nehru announced that India had to become industrialized, and that as fast as possible. While the politicians have done everything they could since then, including Soviet-like planning, to industrialize the country, India has yet to become a manufacturing powerhouse like China. Indians seems more willing to grow crops and sell services than manufacture advanced products and machines.

While India’s economy had recorded impressive growth rates over the past decades, most of growth came from the service sector, and their overall performance is still being dragged down by an underperforming manufacturing sector, resulting in their current growth rate being reduced to 6.5 percent compared to the previous 8.5 percent. It’s still an impressive performance compared to other countries, but it could have been so much better.

Problems with India’s Manufacturing Sector

India’s manufacturing sector has always suffered from an overburdened infrastructure, pothole-ridden roads, clogged ports, and intermittent power supplies that resulted in exorbitant costs of manufacturing. However, their biggest problem is their government’s neglect in keeping up with the private sector’s needs, as outmoded land acquisition and labor laws continue to slow down the industry’s investment and employment plans.

According to Morgan Stanley’s head of emerging markets, Ruchir Sharma, the main cause of manufacturing’s failure to take off in India reflects the broader problems in their economy – there simply is an overabundance of land in agriculture, coupled with the overly complicated land acquisition laws and worsened by archaic labor laws.

Demand for Employment

India’s manufacturing industry has grown over the decade, but only marginally – from 13 percent to 16 percent in a span of 10 years. China, in comparison, has experienced a 30 percent growth in the same time frame, while other countries like Taiwan and Japan had 20 percent.

China is certainly the rulestick that India wants to be measuered with, as manufacturing has become a massive employment generator – pulling people out of poverty and away from agriculture, while the manufacturing exports have earned the country a massive trade surplus.

India, on the other hand, has a rapidly growing population that results in unemployment levels that have risen in the past few years in spite of their rapid economic growth. Additionally, due to the weak manufacturing sector, the majority of their goods was imported from abroad, resulting in a sharply widening trade deficit.

According to the Indian government, they need to create 220 million jobs by 2025 as more and more people enter the labor market, while their underperforming manufacturing sector cannot keep up and will most likely not be able to carry the burden.

What the Future Has in Store

One thing that India has going for it is that its labor has grown cheaper this past decade, with a 2010 study by the American Bureau of Labor Statistics proving that India’s labor costs were similar to China’s, and barely within 3% of America’s. Add the fact that the rupee has fallen by a fifth against the dollar, labor costs are at an all time low.

Assuming that land scarcity, red tape, and a weak education and infrastructure as well as outdated labor laws don’t undermine the appealing labor costs, India may become the next workshop of the world if the government can address the problems and attract investors while resolving their existing bottlenecks.

Source: The Economist

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