Reviews |  India needs to restart manufacturing.  Here's how.

Reviews | India needs to restart manufacturing. Here’s how.


Dhiraj Nayyar is the Director of Economics and Policy at Vedanta Resources.

If the Indian economy has one Achilles heel, it is the country’s manufacturing sector. Despite rapid economic growth since the start of market-friendly reforms in 1991, manufacturing’s share of India’s gross domestic product has remained stubbornly low at around 15%. (In China, it has been around 30% in recent years.) India’s growth has been driven by services, particularly in information technology.

The absence of a large, competitive manufacturing sector has consequences. One statistic more than any other captures the consequence of an underdeveloped manufacturing sector: just over 40% of India’s total workforce is still employed in agriculture and related activities than 18% of GDP. Unlike advanced economies, India does not have an unemployment problem; instead, it fights underemployment. In the absence of significant social security, people cannot afford to go without jobs, so they are forced to settle for low-productivity, low-wage jobs in agriculture. Services have not been able to absorb this surplus of unskilled labour. In fact, they have not done so in any country that has become rich.

Now that three decades of rapid growth have raised people’s expectations, there are more and more demands for quality jobs. Ironically, China could lend a hand. Beijing’s strict ‘zero covid’ policy is seriously disrupting global supply chains. The recent shortage of iPhone supplies is just the starkest example of this. China now poses a greater risk to supply chains than at any point in its rise as the factory of the world in the past three decades. The consolidation of Xi Jinping’s unchallenged control at last month’s Chinese Communist Party Congress marks a firm break with the moderate era initiated by Deng Xiaoping. The deepening of authoritarianism in Beijing translates into great unpredictability in the actions of the world’s second-largest economy. The world is watching with growing concern.

The problems don’t end there. Many critical supply chains outside of China, for example, are in neighboring East Asia, where China has outsized influence. More than 80% of advanced technology semiconductors are made in just two places: Taiwan and South Korea, both of which face ongoing threats in the form of China and North Korea.

The United States seems to have recognized the risks. Last month, the Biden administration announced what is effectively a “tech war” against China by banning the export of semiconductor chips and the technology and equipment used to make them. US allies with access to similar know-how could follow suit. Given that the Trump administration has also cracked down on trade with China, it is fair to assume that there is now a bipartisan consensus in the United States on the need to contain Beijing and diversify critical supply chains.

India is notorious for missing geopolitical opportunities – but this time might be different. Unlike his predecessors, who were mostly from the agricultural heartland of northern India, Prime Minister Narendra Modi comes from the western coastal state of Gujarat, which has long prioritized manufacturing. In Gujarat, the manufacturing industry contributes 30% to the state’s GDP, a level comparable to that of China.

Having served as the state’s chief minister for nearly 13 years before becoming prime minister, Modi is acutely aware of what the industry needs to thrive. Since becoming prime minister in 2014, Modi has tried to make life easier for businesses by cutting regulations and pushing bureaucrats to speed up approval processes. Now, in his second term, he is going further by embracing industrial policy.

India’s long history of failed state intervention has made politicians wary of industrial policy. Yet in recent years, as manufacturing continues to fall behind, Modi has chosen to step in. Its production-linked incentive program is designed to reward domestic and foreign companies in 13 select sectors, from automotive to pharmaceuticals to advanced batteries. The goal is to ensure global competitiveness by reaching a larger scale of production. The program is expected to distribute approximately $25 billion to the industry over four years.

The second is its Semiconductor and Display Factory Manufacturing Program, which offers up to $10 billion in capital grants to potential investors. (Disclosure: My company, Vedanta, applied for grants from this program as part of its investment in a semiconductor and display manufacturing joint venture with Taiwan’s Foxconn.) Interestingly, the grant program was announced before the Biden administration passed its Chips and Science Act. This year.

Modi’s embrace of industrial policy is a gamble, but it may be India’s best hope. Subsidies alone will not be enough. Success depends on the ability of India’s manufacturing sector to prove its ability to compete in global markets. This will likely require a whole host of other structural reforms – a huge challenge in India’s noisy democracy, where a host of vested interests make it difficult to withdraw protections and unproductive subsidies. This will require all of Modi’s considerable political skills (and possibly a third term from 2024).

But the country’s industrialists have no time to waste. Currently, companies leaving China are looking for other options. India must do everything to ensure that it is the first choice.

#Reviews #India #restart #manufacturing #Heres

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