Narendra Modi&’s efforts to develop India as a global manufacturing hub have made some progress. Several multinational corporations, notably General Electric, Bosch, Panasonic, Samsung, BMW, Scania and Xiaomi have announced plans to manufacture in India. These investments will, however, not fulfill the Prime Minister&’s dreams. These companies are anxious to exploit India&’s domestic market.
Speaking to CEOs from abroad, Mr Modi had said that India is the only country in the world which boasts the unique combination of democracy, demography, and demand. The expression “demand” is critical. He is attempting to attract the MNCs to produce for the Indian market, and not for the global market. The United States sees India, with its large population and a growing middle class, as a huge market. On his visit to India, President Obama was accompanied by representatives of America&’s major companies. The unstated objective being that US companies will invest in India for manufacturing goods for the Indian markets and repatriate profits to America. Such manufacturing will scarcely make India a global hub. Mr Modi will have to surmount four hurdles to attain his objective.
The first is that wages in India are rising and the advantage from low wages is increasingly on the decline. A study conducted some years ago mentioned the minimum wage for Cuba as Rs 25, Bangladesh as Rs 46 and Kyrgystan as Rs 61 per day, against Rs 128 for India. Therefore, the MNCs might wish to go to these countries instead of coming to India, if cheap labour was our strength. This comparative advantage of ours is also disappearing because of automation. Professor Ravi Aron of Johns Hopkins University says, “In industry after industry, we have seen automation in the form of robotic production, digitization of business processes and precision-manufacturing techniques. Manufacturing is returning to the U.S.”
The number of workers required to run a factory is constantly declining. It is profitable for a multinational to manufacture in America for the US market since it has to employ only a handful of workers. This elimination of labour is happening in India as well. I know of a sugar factory that used to employ 2000 workers to produce 2000 bags of sugar a day 40 years ago. Today it is employing 500 workers to produce double the amount of sugar. Operations such as unloading sugarcane, feeding bagasse into the boilers and running centrifugal machines have been fully automated. The days when MNCs made a beeline to China to take advantage of its low wage rates are gone. Manufacturing will be increasingly undertaken near the markets so as to reduce the transport costs. So India may, at best, manufacture for India, but it is unlikely we, or any other country, will ever manufacture for the world as China did in the last two decades.
The second roadblock is that the share of manufacturing in the global economy has been consistently declining. The share of agriculture in the developed countries is around one per cent, the share of manufacturing is around nine per cent and that of services is about 90 per cent. The share of services increases as the level of income rises. A rich person may buy 20 pairs of clothes, but he cannot keep on buying thousands of pairs. On the other hand, he can visit several tourist areas, go to massage parlours, buy computer games’ software etc. The demand for services will continue to increase while that for manufactured goods will reach a plateau. Hankering after manufacturing is like trying to jump on to a sinking boat.
The third problem is that of a global glut in manufactured goods. China has “over-invested” in manufacturing. Its factories are idle. The decline in China&’s growth rate in the last two years is mainly because it is unable to export the goods because of declining global demand. Trying to carve out a place for ourselves in the global market is like trying to enter a Second Class railway compartment that is already jampacked with passengers; or like driving a trailer through the weekly roadside market.
The fourth is the lack of land and electricity in India. We have four times the population and one-third the land of the United States. We cannot divert agricultural land for putting up industries because that will affect food production. . The huge resistance to the amendments proposed by Modi to the Land Acquisition Act are an indicator of the dearth of land. We also do not have electricity. Our coal reserves are expected to last for only 150 years. We do not have large sources of uranium. Our potential of hydropower is difficult to exploit because of the huge cultural value of rivers, notably the Ganga and Narmada, and the environmental damage. It is difficult for us to provide electricity to the new industries that may be set up. Mr Modi is trying to climb up the wrong tree in his efforts to push global manufacturing in India. The effort is destined to fail.
The Prime Minister must focus on the development of the services sector instead. This sector includes diverse spheres, such as architectural designing, translations, legal research, movies and music, and tourism. The sector does not suffer from the four roadblocks mentioned. Success in the services segment depends on the high level of skills, not on the low level of wages. Bangladesh will be able to compete with us in services only if it can impart the required education to its workers. Developed countries are also unable to compete with us on this count. President Obama, for example, has repeatedly told his countrymen that they are unable to compete with Indians in mathematics.
The second roadblock related to the declining share of manufacturing. This tendency becomes an asset in the services sector, the share of which is increasing. The third roadblock was of a global glut of goods in the international market. Indeed, countries like the Philippines are giving us stiff competition in areas like call centres. But this can be overcome because new services are being created every day. For example, computer games were not known to exist two decades ago. Global competition can be faced by entering a new genre of products such as space travel, astrological advice, aroma therapy and acupuncture. The fourth roadblock related to the shortage of land and electricity. The services sector requires a fraction of land of that required by manufacturing. The electricity consumption in services is about one-tenth of manufacturing for the same amount of output. Mr Modi must therefore shed his obsession with manufacturing and focus on making India a global services hub.