Five-year plans may be largely symbolic. But the symbolism
of Indias latest draft plan is significant.
Indias Planning Commission is targeting an average GDP
growth rate of 9% over the next five years. At a time when
Chinas 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 Chinas 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, Indias 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 latters
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 countrys long-term trade
imbalance. In its approach paper for the upcoming five-year
plan, which will run from 2012, the governments planning
commission has targeted 1112% 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 governments ambitious long-term growth plans.
INDIAS MISSING STEP
According to Indias 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 1011%.
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 agricultures contribution has fallen from
30.3% to less than 15%.
While Indias 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 Delhis
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 cant. 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 Indias 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 Indias Planning Commission, tells Emerging
These points are emphasized in the Planning
Commissions 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 Indias growth to be inclusive, it
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. Thats a message he says Indias
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 thats 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, Indias 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
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, Indias
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 Indias 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 Indias 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
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
wasnt necessary... In the process of policy development
and implementation, we need a policy that suits a democratic
setup, he adds.
Manufacturers acknowledge that the governments drive
to rationalize taxes and import duties is improving things.
Srinivas Shirgurkar, managing director of Bangalore-based
machine tool-maker Ace Designers, says his companys tax
burden has been reduced significantly in recent years. As
recently as 2000, taxes accounted for about 38% of the
companys sales price much of this was due to
regional and national customs and import duties but this
has now fallen to 45%. 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 Indias 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
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.
Shirgurkar acknowledges these ongoing obstacles, but remains
confident about the ability of Indias 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
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 dont 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