INDIA: Field of dreams

22/09/2011 | Vir Singh

India is actively seeking to outpace China in the years ahead. But its ambitious growth plans will be hard to achieve without radical expansion of its chronically underdeveloped manufacturing sector

Five-year plans may be largely symbolic. But the symbolism of India’s latest draft plan is significant.

India’s Planning Commission is targeting an average GDP growth rate of 9% over the next five years. At a time when China’s growth rate in its latest five-year plan was lowered to 7%, it is the clearest indication yet that India is actively seeking to overtake China as the main driver of global growth in the coming years.

But while the growth targets may be familiar to those who have observed China’s spectacular rise over the past two decades, the composition of this growth could hardly be more different. Whereas the east Asian growth model has been driven by manufacturing, India’s expansion has largely been driven by the service sector. India has precisely the kind of dynamic service sector that China is now aspiring to, but without the manufacturing base that drove the latter’s success.

This looks set to change, however. The government has now prioritized manufacturing growth as a key condition both to meet its ambitious growth targets, and to create additional employment and address the country’s long-term trade imbalance. In its approach paper for the upcoming five-year plan, which will run from 2012, the government’s planning commission has targeted 11–12% year-on-year manufacturing growth between 2012 and 2017, with the aim of creating two million additional jobs a year.

The stakes are high: a failure to hit these targets could threaten severe social and political upheaval and cast doubt on the government’s ambitious long-term growth plans.

INDIA’S MISSING STEP

According to India’s Planning Commission, manufacturing is expected to grow by just 7.7% during the current five-year period ending March 31, 2012, against a target of 10–11%. It notes that manufacturing growth has not shown the “dynamism” of the overall economy. As a result, manufacturing accounted for just 15% of GDP, compared with 34% in China and 40% in Thailand. The contribution of services, by contrast, has jumped from 44.1% to 56.9% over the past two decades, while agriculture’s contribution has fallen from 30.3% to less than 15%.

While India’s dynamic service sector has helped to drive impressive headline growth, a wide range of experts has warned that it has only benefitted a relatively small proportion of the population.

Jayati Ghosh, professor of economics at New Delhi’s Jawaharlal Nehru University, estimates that IT-enabled services employ less than 1% of the workforce. She says that a rapid change of emphasis is needed on the part of policymakers: “You really have to move people out of [agricultural] employment. The Indian perception is, ‘you can do it without industrialization.’ It is a mistake to think we can bypass a stage of genuine growth. We can’t. Services growth will not trickle down.”

With the approach early next year of crucial state elections, which will set the stage for a general election in 2014, there are signs that India’s political leaders are finally taking note.

“We need more jobs, and the manufacturing sector needs to grow to create more jobs. And we need more manufactured goods so that we can balance our trade. In terms of economic need, these are the two imperatives,” Arun Maira, a member of India’s Planning Commission, tells Emerging Markets.

These points are emphasized in the Planning Commission’s draft approach note for the upcoming five-year plan, which will come into effect from April 1, 2012. “Unless manufacturing becomes an engine of growth, providing at least 100 million additional decent jobs, it will be difficult for India’s growth to be inclusive,” it warns.

CHALLENGES AHEAD

But while this government emphasis is clear, manufacturers continue to face many structural challenges which cast doubt over the ability of the government to hit these targets.

Arcane land acquisition laws, drafted more than a century ago, are a major impediment. Numerous confrontations have occurred because there are no clear legal guidelines on conditions for acquisition, the rights of local people, or the terms and processes to arrive at an agreement.

“Land is a big problem in India,” says Indian-born Yogem Rahangdale, the former head of American Axle and Manufacturing, a US automotive firm, and one of a number of Indian industrialists who have built successful manufacturing enterprises overseas. He recalls difficulties he experienced while trying to set up a plant in India. “The title was not clear, which led to delays. In business, time is everything.” That’s a message he says India’s bureaucrats at all levels still fail to appreciate enough.

Another less visible but equally formidable challenge is a shortage of skilled workers. “To achieve China-style growth, you need a skilled labour pool, and that’s just lacking [in India],” says Shumita Sharma Deveshwar of Trusted Sources, a research firm. A government study of the road-building sector in 2008 found that the supply of skilled and semi-skilled workers could fall short by nearly two-thirds by 2015, based on assumptions at that time of how much that industry was expected to grow.

Furthermore, India’s chronic infrastructure deficit is a major impediment to the movement of goods and the creation of efficient supply chains which, in China, have contributed to the surge in manufacturing across eastern coastal provinces.

Adit Jain, managing director in India for International Market Assessment, a business research firm, says that while in Singapore it takes six hours to unload a container ship and in Shanghai it takes eight hours, in Mumbai, India’s financial capital, it takes two days. The reason: there is no dedicated freight corridor out of the Mumbai port, so trucks cannot come and leave as quickly as they can elsewhere.

SIGNS OF PROGRESS

There are signs that the government is making progress on some of these fronts.

Earlier this month, the government scored a victory of sorts when India’s cabinet approved a draft law that spells out conditions and procedures for the acquisition of lands, payment of compensation and resettlement of people. The proposed legislation will now go to the lower house of parliament. “If the acquisition process is transparent and prices given [to locals for their land] are commercial, half the issues will go away,” says Jain.

Maira says that India’s democratic model has in the past made it difficult to reach consensus and make progress on key issues such as land acquisition and infrastructure, but he believes that the situation is improving and is helping to deconstruct barriers to industrial investment.

He cites the example of all state governments engaging in long and detailed discussion to implement a new goods and services tax (GST). Similarly, he says, the draft law on land acquisition reflects substantial consultation with stakeholders. “The principal thing to do is to have a much more constructive engagement with stakeholders,” he says.

But he acknowledges that the process is slower in India than it has been elsewhere, citing the fact that it took almost three years to reach agreement on the GST. “The country needs to have a very strong consensus. Perhaps in China that wasn’t necessary... In the process of policy development and implementation, we need a policy that suits a democratic setup,” he adds.

Manufacturers acknowledge that the government’s drive to rationalize taxes and import duties is improving things. Srinivas Shirgurkar, managing director of Bangalore-based machine tool-maker Ace Designers, says his company’s tax burden has been reduced significantly in recent years. As recently as 2000, taxes accounted for about 38% of the company’s sales price – much of this was due to regional and national customs and import duties – but this has now fallen to 4–5%. “This has happened across the industrial sector,” he says. “As the cost comes down, your price comes down, demand shoots up many, many times. That has really given a fillip to increase demand.”

Experts express cautious optimism on infrastructure. Jain says that while India’s growth was largely driven by domestic consumption over the last decade, in the next 10 years, “we will find that a lot more of this growth will come from investment in physical things, through partnership between the state and the private sector.”

He adds: “The sort of growth that China had in the last decade, India will have in the next decade.”

In response to complaints over the shortage of skilled labour, the government has, since 2007, launched around 2,000 industrial training institutes, and a National Skill Development Corporation, both in the form of private-public partnerships.

Nevertheless, there are doubts about both the scope of this scheme and the quality of instruction being provided by the institutes. “The government is talking about setting up these national skills development centres, but the pace at which they are setting them up is not equivalent to the pace at which India can and should grow,” says Deveshwar.

But the problem is not just with numbers: according to a January 2011 report by Trusted Sources, “The problem is not so much the number of [training institutes] as their quality. Companies have typically had to retrain graduate recruits from those institutes in more specific skills required for the job.”

CAUTIOUS OPTIMISM

Shirgurkar acknowledges these ongoing obstacles, but remains confident about the ability of India’s manufacturing sector to accelerate in the coming years. “My firm conviction is it is possible. Not because of any government policy but by the sheer entrepreneurship of people here,” he says. “We can produce cheaper than the Chinese. We do not [yet] have that scale, but the investment is happening now. That confidence is there.”

His firm, which invested a billion rupees over 30 years, now plans to invest twice that amount in the next 18 months. As for his experience with land acquisition, Shirgurkar insists that the situation “is not as bad as what you read in the press,” but concedes that it took two years to buy the land for a new factory. “It takes time,” he adds.

That is what all investors coming to India must accept, says Vipin Sondhi, managing director and CEO of JCB India Ltd. “Assuming the land issue is addressed, anybody coming to India must come to be here for the long term. In that, a six-month process to get approvals is not a long shot. The important message to overseas investors who are coming is, ‘Come for the long term; you will benefit.’” Sondhi knows this first hand. JCB came to India in 1980, and today the country is its biggest single market.

THE COST OF FAILURE

Whether or not the government can afford to wait for the long term, though, remains to be seen.

Many express scepticism that the government will meet its manufacturing growth targets over the next five years, in spite of progress in some areas.

Furthermore, Ghosh believes that even if the government does achieve this target, it is highly unlikely that manufacturing will create as many jobs as government planners hope, because its strategy favours large corporations over small and medium-size enterprises, which are responsible for more than 40% of manufacturing output and create most of the sector’s jobs.

With record numbers of Indian graduates due to enter the already overstretched Indian job market in the coming years, she warns of the likelihood of increasing discontent should job creation not occur on the scale needed, citing the rise of regional and semi-fascist organizations based around opposition to internal migration and concern over a lack of jobs. “I think the prognosis is very bad,” she says. “More people are investing heavily in and receiving higher education, and if they don’t get jobs [after graduation], you will have the most vile kind of reaction.”

And while it may be possible to achieve growth in the region of 9% in the short term without an acceleration in manufacturing and job creation, she believes that any such growth will be short-lived. “We can [grow without this] for a short time. But then the bubble will burst,” she adds.

Related stories


Editor's Picks


In Focus

  1. RUSSIA: Putin’s Crimea victory risks economic defeat

  2. BANKING SECTOR: Cautious optimism returns to CEE banks as recovery begins

Parts of the democratic process are under siege.

Radmila Sekerinska, president, National Council of European Integration