Dealing with manufacturing sector

China should not ignore India's increasing competitiveness in the manufacturing sector, said a recent editorial in the Global Times, a Beijing-controlled daily. "Official data showing India's January exports to China soared 42% year-on-year was overlooked by most Chinese analysts, but it will be a very dangerous venture if China adopts an arrogant attitude toward India's increasing competitiveness," the state-controlled tabloid said. "Scholars should make a careful analysis of the soaring growth to find out whether this is merely a flash in the pan or a result of subtle changes in competition in the manufacturing sector." Recent data from New Delhi revealed that there was a marked increase in Indian exports to China—52% spike in cotton, more than 810% in inorganic chemicals and nearly 200% in iron and steel. China, though, continues to maintain a significant advantage over India in bilateral trade. Last year, Deloitte Touche and the Council on Global Competitiveness published the Global Manufacturing Competitiveness (GPC) Index. The GPC Index predicted the rise of the "Mighty Five"—India, Thailand, Malaysia, Vietnam and Indonesia. This group of nations is likely to take China's place as the hub of manufacturing, given their ample supply of cheap labour, large markets, favourable demographic characteristics, and competitive economic growth. China's stupendous growth in the manufacturing sector thus far was down its ability to leverage its abundant supply of cheap labour. Research group Euromonitor International, however, now reports that Chinese factory wages have seen a substantial increase over the past decade. Their wages exceed those in almost every major Latin American nation and are at around 70% of the level in weaker Eurozone countries. The bottom line is that Chinese labour isn't very cheap anymore, resulting in a significant realignment in global manufacturing trends. Other countries, especially in South and South-East Asia, are now cashing in on low-cost production jobs, particularly in apparels and cheap electronics.

Can India fully exploit the benefits of this apparent realignment? The NDA government seeks to increase the share of manufacturing sector to 25% of GDP from the existing 17%. The manufacturing sector supports just 12% of all jobs. There is a lot of ground that India needs to cover before realising its potential. The lack of a sound energy, transport, and communication infrastructure, limited resolution on land and labour laws and excessive government interference in regulating business, among other factors, continue to stymie India's potential. India also faces stiff competition from other nations in South Asia and South East Asia. Although countries like Vietnam and Bangladesh are smaller in geographical area and population, they are seemingly better integrated into global supply chains. The latest Economic Survey published by the Centre brings that fact to the fore. "The space vacated by China is fast being taken over by Bangladesh and Vietnam in the case of apparels; Vietnam and Indonesia in the case of leather and footwear. Indian apparel and leather firms are relocating to Bangladesh, Vietnam, Myanmar, and even Ethiopia. The window of opportunity is narrowing, and India needs to act fast if it is to regain competitiveness and market share in these sectors," said the survey. Finally, recent geopolitical developments and rapid progress in technology could together pose serious difficulties for governments. The manufacturing sector has been pegged as a saviour for greater employment generation. But the Indian manufacturing sector today is highly automated. Increasing automation in the manufacturing sector further reduces the scope of job creation.

Why would a factory owner need to pay additional workers when a single machine can do the job? The Boston Consulting Group, an American global management consulting firm, believes that robots will do 40% of manufacturing tasks in the years to come. A booming manufacturing sector will contribute to higher growth, but not necessarily more jobs. This "correction" is part of a large global dynamic in the manufacturing sector characterised by the rational management of the factory floor. Last year, news of Indian engineering giant Larsen & Toubro's decision to lay off 14,000 employees (over 10% of its staffers) in the months leading to September raised eyebrows within policy circles. In a statement, L&T argued that the mass layoff was part of its bid to "right-size" during an economic slowdown and maximise on digital developments. The company decided to lay off 14,000 employees despite claims that its second-quarter profit rose by 84.3% to Rs 1,434.63 crore and a reported increase in revenue by 8.2% to Rs 25,010 crore in the second quarter. On the geopolitical front, countries now have to deal with greater trade protectionism and shortening global value chains, backed by the rise of populist governments across the Western Hemisphere. Modi government and its successors will have to engage in significant structural reforms in the domestic economy, subtle and purposeful diplomacy, and trade negotiations and the prospect of jobless growth with rising automation.