For a few years now, a facile dichotomy has made the rounds in economic circles: Among developing countries, China means manufacturing and India means services. Yet, several leaders of the public and private sector in India see the country’s road to riches leading through manufacturing as well.
For Anand Mahindra, vice-chairman of Mahindra Group, the Indian detour into services was a matter of happenstance more than design. While the Indian government made rule after rule about manufacturing in the waning years of the 20th century, it largely left information technology (IT) companies alone.
“There were no regulations to impede them, because no one knew what kind of animal the industry was,” Mahindra said from his office in Mumbai. “We did not have large investments in infrastructure. We did not have large investments in manufacturing. The growth came from the IT boom, the services boom and large gains in agriculture, and then, of course, consumption.”
Core constraints: The Nokia factory at Sriperumbudur in Tamil Nadu. India’s physical infrastructure has been running behind its potential to grow, but the government is hopeful it will catch up within a few years. (Photo: Madhu Kapparath/Mint)
His company, which made its name in automobile manufacturing, now has one of the biggest information technology businesses in India, he said. But, he still sees manufacturing as the priority: “The second phase of India’s growth is now being investment-led. That first wave clearly provoked more reforms, more liberalization. The rise of China has not been lost on us, obviously.”
This time, the government is singing the same tune. “For India, manufacturing sector gro-wth is very important,” Kamal Nath, the Union commerce minister, said in an interview in New Delhi. “We did 12% growth last year; we’re doing about 8.5% growth this year.”
Each job in manufacturing, Nath said, has the potential to add several jobs in services. But, where will all those people work, and where will they live? In China, perhaps hundreds of millions of people have moved from rural homes to cities crammed with factories and dense housing. The same thing may need to happen in India if labour is to be concentrated enough for a manufacturing push.
India cannot grow the same way as China, though, even if it does pursue low-cost manufacturing just as avidly. India is a functioning democracy, where local governments do battle with New Delhi and small constituencies make their voices heard. The Central government cannot rule by fiat, and officials are loath to follow a path that has not been tested as a precedent.
That is why India needs easy-to-follow templates for growth, Mahindra said. To him, the right template is one borrowed from China: the special economic zone, or SEZ, a place where taxes are low, power grids are new, licensing is relaxed and labour is freely hired and fired.
“You have an enclave from which you can work and ignore all the baggage of the old India,” he said, like rigid labour laws and lousy infrastructure. “Is that ideal? No, obviously you would want a pan-Indian rule. But you have the template.”
Nath agreed that SEZs were important, but he denied that they were sufficient to drive growth. “It is one of our greatest flagship employment-generation programmes,” he said, creating more than 200,000 jobs directly and about 400,000 more indirectly since February 2006. “But, for those who are not exporting, who are for the domestic market, why should they go for the SEZs?”
Another concern is that SEZs may be too small for the hundreds of millions of workers who could drive the Indian manufacturing sector.
“Scale economies don’t arise,” said Atanu Dey, chief economist of Netcore Solutions, an information technology company started by Rajesh Jain, a well-known serial entrepreneur. India needs to plan new megacities, he said, with far more capacity than what they may need today.
Nath said India could still distinguish itself by leveraging productivity instead of masses of unskilled labour.
“India is emerging as a manufacturing hub, as an efficient technological manufacturing hub, not a mass-production hub,” he said. “Mass production does not necessarily mean that it’s employment-heavy. All manufacturing today has an information technology backup.”
That kind of manufacturing requires different types of infrastructure: transportation, energy and telecommunications, for starters. Nath said India’s physical infrastructure was running behind its potential to grow, but he expected it to catch up within a few years. Energy, however, could be a tougher nut to crack.
“That is the biggest constraint in India’s future,” Dey said. “India’s economic growth rate could stall. I don’t know if it can compete with China in securing those energy resources,” he said.
©2008/International Herald Tribune