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Manufacturing ecosystem in India: Lessons from China

• China’s emergence as a global production hub is primarily on account of developing the manufacturing sector and focusing on manufacturing & exports. Imbibing from China is not the answer but developing a manufacturing ecosystem in line with Indian conditions is the need of the hour.
• Despite COVID crisis, export promotion should be a conscious policy agenda. The underlying objective is to expose the industry to market discipline that can promote productivity, cost efficiency and product development.
• For India to emerge as a chosen destination for investments flows, therefore, a focused development agenda prioritizing industries with high technology spill overs is necessary. Policy support for investments in productivity enhancements and R&D spends should be in place.
• The overall policy should be to enhance technology adoption. Intermediate goods industries must be encouraged with the addition of necessary supporting infrastructure.

India’s share in world manufacturing value added (MVA) was merely 2.84% in 2018. The share of manufacturing in GDP is 17%, in spite of the vision statement of increasing the share to 25% by 2020 (Niti Aayog, 2018). India, with its domestic market base, does have opportunities to enhance its manufacturing performance. This requires a policy frame that is in line with ground realities. As such, it is important to question what made China a manufacturing hub and why India was not able to achieve the manufacturing targets it set for itself.

China’s emergence as a global production hub is primarily on account of developing the manufacturing sector and focusing on manufacturing & exports. Its share in world MVA increased from 11.6% in 2005 to 24.8% in 2017 (CIP UNIDO, 2018). Manufacturing exports of China as a share of the global total increased from 0.8% in 1980 to 17% in 2018, the highest in the world, outpacing USA, Germany and Japan. As such, China acquired the first rank in Global Manufacturing Competitiveness Index (Deloitte 2016) and as per the recent UNIDO data on CIP, it is ranked 3. In China, manufacturing accounts for over 40% of the GDP.

China has emerged as a world’s factory following a planned strategy. The MIC 2025 clearly highlights the future developments of industry, which are centred on high tech and emerging industries – electrical equipment, farming machines, new materials, energy saving, information technology, aerospace equipment, railway equipment and ocean engineering equipment. This is in line with the future demand structure. Such foresight is also necessary for India. While the current product profile – toys to API – is required but positioning to future developments would be strategically important.

China’s remarkable manufacturing performance is driven by strong productivity gains, an outcome of advanced manufacturing systems, fully developed local supply chains, growing investment and focus on high technology. Planned investments in early 2000s focused on productivity enhancement (50%), R&D (28%), energy saving (12%). As such, there is a wide spectrum of industries, which are globally competitive: labour intensive goods – paper, furniture; mid-tech industries – cellular phones, optical instruments and washing machines; and high-tech engines, agricultural machinery, machine tools and pharmaceuticals.

Adopt a customised approach

In all these, innovation has defined the competitive advantage. The targets are clearly set in MIC 2025 where the focus is on strengthening microelectronics, aerospace, computing, robotics and renewable energy. The government’s developmental initiatives – industrial regions with concentrations of assembly plants, skilled workers and material and component suppliers, provide immense scale economies.

Imbibing from China is not the answer but developing a manufacturing ecosystem in line with Indian conditions is the need of the hour. Focus should be on sectors that have wide industrial applications & need immediate attention. These include electronics, chemicals, machine tools, steel & tele-communications. A detailed policy framework for electronics, pharmaceuticals and tele-communications were drawn in 2012 but most of the proposals are yet to be implemented.

Take the case of electronics, for example. To address the cost disadvantages, M-SIP was introduced but with limited effectiveness, as most of the SMEs were excluded on account of threshold investment. Timely procurement of components requires bonded warehousing, which needs to be implemented. Further, to promote design capability and establish end-to-end manufacturing, the policy for establishing ESDM (Electronic System Design and Manufacturing), EDF (Electronic Development Fund) and establishment of semi conductor wafer fab must be implemented.

A standard setting body needs to be ensured at the earliest, since without such a framework, imports and exports are not subjected to indigenous standards. With high rate of obsolescence, continuous investment in technological upgradation is necessary, which is not happening due to uncertain investment climate. The Make In India initiative needs to be supported by technology transfer under joint ventures.

Post-COVID, the trade orientation is likely to change. Countries may increasingly become inward-looking with specific approaches of developing domestic capability, localized supply chains and focus on domestic market development. Consequently, countries may resort to tariff and non-tariff barriers. Under these conditions, export opportunities may diminish. However, developing export competitiveness with quality and cost, would provide India a better opportunity when global trade normalizes. The policy challenge is to support the domestic industry without compromising on cost efficiency.

Develop end-to-end supply chain

Further, despite COVID crisis, export promotion should be a conscious policy agenda. The underlying objective is to expose the industry to market discipline that can promote productivity, cost efficiency and product development (as with the experience of Asian tigers). In this regard, scale of operation would be an important determinant. The difference in the scale of operation between India and China is an eye opener (see chart below). The consolidation of industrial establishments since 2010 has made the difference for China. Similar efforts for critical industries like electronics, machine tools, chemicals need to be worked upon as these industries supply intermediates to most consumer goods industries.

Scale of operation in China and India (2004-2014)

Source: INDSTAT4, UNIDO

Currently, India’s manufacturing exports are dominated by low technology intensive manufactures, which account for almost 50%. We should consciously upgrade to medium and high skill products. This would not be possible if a fractured value chain exists. The focus should be on critical intermediate goods industries like electronics, chemicals and machine tools. Developing local competitiveness in these industries will facilitate productivity and cost competitiveness in many industries such as pharmaceuticals, automobiles, domestic appliances, energy products, etc

For India to emerge as a chosen destination for investments flows, therefore, a focused development agenda prioritizing the industries with high technology spill overs is necessary. Policy support for investments in productivity enhancing and R&D spends should be in place. The emphasis should be on technology upgradation and adaption and mandate FDI with technology transfer. We did this for the automobile sector and the same can be emulated for other sectors as well. SMEs need to be developed as ancillaries for establishing an efficient supply chain and supply chain infrastructure. Critical to all this is the overall development of support infrastructure, particularly transport and port infrastructure. Without these fundamentals, mere relaxing of FDI policies will not bring in investment flows and will undermine the targeted outcomes. 

The large domestic market is an opportunity that can be leveraged with focused outcomes. With a large middle class and rising per capita incomes, the double-digit growth in domestic demand should be positioned to upgrade and work towards increasing manufacturing productivity. Innovations and product development can take the Indian corporate to achieve global competitiveness. The high contribution of Indian diaspora in many multinationals is a strong indication of potential outcomes under favorable working conditions. It is here that the supportive role of government’s policy framework and development of support infrastructure can catapult the industry’s growth.

Industrial organization focusing on cluster development can enable integration of the SME sector to development. Reservation should not be the approach for SMEs. Instead, the focus should be on technology support to make them dynamic and cost effective.

The vast pool of skilled and unskilled work force should provide the necessary impetus for industrial growth (see table below). Low labour cost across industries can be leveraged with appropriate policy reforms. Most industrial establishments have opted for high capital intensity, which is a response to rigid labour laws and not technology upgradation. This needs correction.

Unit Labour Costs for selected Industries: India vs China (2004 – 2014)

Source: INDSTAT 4, UNIDO

To sum up, while learning from the experiences of China and ASEAN countries, India should develop its own policy framework that is line with the fundamentals and context. The policy outcomes need to be carefully monitored. Make In India and Skill India are conceptually good programmes but there should be greater compulsion towards developing manufacturing capability in India as opposed to just assembly. A serious introspection is necessary on this front.


Dr. Sunitha Raju is a Professor at IIFT. She has 30 years of extensive experience in Education, Research, Policy formulation and Evaluation. Held the positions of Chairperson (ICCD), Chairperson (Research) and Chairperson (GSD). Her areas of expertise include Trade Policy Formulation & Evaluation, Trade modelling, Agricultural Policy Analysis, WTO rules & Regulatory framework, Free Trade Agreements, Survey Research, Performance Reviews, Training & Management Development Programmes.

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Singham
Singham
11 months ago

Best person to tell you about micro n macro economics, she is really required for the growth of Industries as well as export or trade promotion in India. The best group which can serve this country is
“Raju mam, Sahu Sir, Ram Sir, and Tammanna mam”.