Why India is the ideal hub
Make in India success hinges on global value chain manufacturing
The bounce back in the share of manufacturing in second-quarter GDP in 2017-18 unleashed a fresh impetus to the Make in India initiative, which remained tardy in the post demonetisation period. The manufacturing sector growth resurged to 7.0 per cent, nearly to the previous year's level, after a sharp drop to 1.2 per cent in the first quarter of 2017-18. This shows that the impact of demonetisation was a short term effect.
Today, the Indian economy is globally integrated. It has become one of the important engines for global growth. To this end, polarisation of Make in India on sectoral growth and labour intensive industries is not the panacea for success. Integration of manufacturing through the global value chain (GVC) had become vital for Make in India.
Firms in developed countries combined their high-tech knowhow with lower wage labour in developing countries to produce their goods at lower costs. Eventually, production has become increasingly fragmented through the growing prevalence of GVC, with production of components across the borders. South East and East Asia, especially, exemplified this new pattern of production.
In this process of GVC value added manufacturing, many of the developing countries, such as China, Vietnam, Thailand, Bangladesh, Mexico, and other South East Asian countries, have benefitted by sharing labour-intensive production with low cost for the developed nations . But India trailed behind in this race. Reasons: there were limitation of scale, difficulty in accessing cheap credit and lack of adequate skilled labour. These economic ills shadowed India's potential as a manufacturing exporter and became detrimental for it to enter the GVC network of manufacturing.
Given the new wave of manufacturing in the world and India's growth being globally integrated, sectoral development and labour intensive industries are not the only catalysts for the Make in India success. Technology upgradation and skilled manpower are imperative for India to become party to GVC manufacturing network. Even though the country's manufacturing landscape has made a transformational change from traditional to modern industries, such as automobile and electronics, which resulted in traditional labour-intensive industries being outstripped by technology base industries, the changes are yet to make India potent for GVC network for manufacturing, like Vietnam and other South East Asian countries. This is despite the fact that India is already engaged in multilateral FTA with ASEAN and bilateral FTAs with Malaysia and Thailand.
Success of GVC value added manufacturing network depends on how the component makers, dubbed "supporting industries", function efficiently to upgrade technology, which is required for the assemblers. To cut costs and re-enter competitiveness, Toyota Motor Company, after the Japanese currency yen appreciated, adopted the GVC system of manufacturing to produce their Asian car models. It set up a five-country network for auto part production in four ASEAN countries and India. Production facilities for diesel engine, press parts and axle were set up in Thailand, manual transmission (middle type) in Philippines, engine computer in Malaysia, gasoline engine and door lock in Indonesia and manual transmission (large type) in India.
In this current trend of global production, how should India's manufacturing landscape fit in if Make in India vows for a success? India's manufacturing sector needs to be divided into two parts. The first part should include development of natural resource-based industries, such as agro-based, textile, mining and metal industries. The second part can cover component-based industries, such as automobile, electronic and digitisation.
It is the second part where GVC value-added manufacturing will work well. India can be the manufacturing hub for component and parts in GVC production network, which are labour intensive, for the developed nations. Factors which go in favour of India are India's demographic dividend and edge in low-cost manufacturing competitiveness over South East and East Asia countries.
However, one of the important headwinds for low-cost manufacturing In India is the lack of skill development. It is an important factor to make a nation potent for GVC manufacturing network. India is yet to ramp up its bottom down skilled workforce. Only 2 percent of the workforce is skilled in India, compared to 40 percent in China. The reason for abysmally low skill development is that formal education does not impart suitable skills to make candidates viable for employment. The ITIs – government run training institutes -- are either poorly managed or outdated. In China, skill development is geared up by steering secondary schools students into formal skill training programme.
Given the Indian economy's integration into the global economy, which depends on advancement of technology, Make in India warrants the Supporting Industry model, which Vietnam adopted for their success in industrial growth.
Supporting industries are a group of manufacturing industries that supply parts and components or process them for the assemblers, such as automobile, electronics and precision equipment. Supporting industry is low cost, capital intensive and high labour intensive with high –skilled labour.
In Vietnam, Supporting Industry proved to be a boon to the growth of automobile and electronic industries The country has achieved 90 percent localization in manufacturing motorbikes. Vietnam is the second biggest manufacturer of motorbikes in ASEAN. Electronic exports from Vietnam are ten times more than India's.
Electronic is a Support base industry. Manufacturing of mobile phones and electronic components is low capital and high labour-intensive industries. There are several factors which favour India as a better destination for mobile phone and electronic component manufacturing. Cheap wages and low land cost can prove propitious for the development of component and parts for mobile and other electronic equipment manufacturing in the GVC network of manufacturing.
India is moving towards digitisation. To this end, the GVC network of manufacturing will work well. According to Morgan Stanley, digitization and Smart City will boost
the country's GDP growth in 2026-27.
(The views expressed are strictly personal.)