After gaining independence at about same time, India and China took two distinct paths to rebuild their domestic economy, where the former incentivised capital-intensive industries, the latter focused on labour-incentive industries. Then eventually India moved from manufacturing towards services in the late 90s and now India is the fastest growing service sector in the world (9.2% in 2015-16) and also now contributing about 66% to the Indian GDP. Not only that, this sector also attracted 60.7% of India’s total FDI inflows in 2016-17.

If we add the trade statistics here, Indian service exports now contributing around 3.35% of world services exports and valued at 160 billion dollars plus in 2016-17, which is twice of the merchandise export and it has the potential to hit 300 billion dollar by 2022. Till the global financial crisis of 2008, India’s services exports was registering a good growth for almost a decade but during 2005-06 to 2014-15, services export growth reduced to 11.9% CAGR from 21.9% CAGR during 1994-95 to 2004-05 and also in 2016-17, software services exports, which account for 45.2 per cent of total services, declined by 0.7 per cent. Though India has the fastest growing service sector, it employed the lowest share of services employment (28% in 2014). Not only these, but also there are some complex challenges emerging in the services sector as far as global footprint is concerned. First, the protectionism mentality of the West. Though the latest bill on granting permission of permanent residency of H-1B visa holders is withdrawn, the challenges are far from over. According to data published by the United States Citizenship and Immigration Services (USCIS), an increase in the salary threshold from $60,000, decided in 1998, to $100,000 will increase the wage bill for Infosys Ltd, Tata Consultancy Services Ltd, Wipro Ltd and Tech Mahindra Ltd by at least $1.7 billion. In response, Indian firms have already picked up hiring in the US and as 60% of the revenue from 160 billion dollar plus IT exports is from exports to US – this is a huge hurdle.

Two, Rise of e-commerce, mobile computing and penetration of the internet, demand in the industry has shifted from traditional products—application creation and management—towards new technologies.

New Delhi will, no doubt, continue pushing for freer movement of its skilled professionals across borders. It has been lobbying at the World Trade Organization (WTO) for multiple-entry visas on cross-border movement of services, relieving professionals on short stints from social security contributions, insurance visas, etc., as a part of the Trade Facilitation Agreement for Services. But judging by the opposition to this agenda—whether at the WTO or on a bilateral level—banking on success here would be naive.

Sign of light in the gloom :

First, India, not only the second most populous country of the world, it has more than 65% of people under 35 age and India has a median population age of 27.3 years compared to that of 35 years for China and around 47 years for Japan. So when there will be deficit in working population in the world, India will be having surplus.

Second, According to a recent report by research group Euromonitor International, Chinese factory wages—which have trebled over the past decade—now exceed those of almost every major Latin American country and are closing in on pay levels in the weaker Eurozone countries. Thus far, China has leveraged its abundant supply of cheap labour to emerge as the world’s leading manufacturing destination. But the fact that labour is no longer so cheap could potentially have multiple ramifications.

Third, Last year, the Global Manufacturing Competitiveness Index published by Deloitte Touche and the Council on Global Competitiveness indicated the rise of the “Mighty Five”—Malaysia, India, Thailand, Indonesia and Vietnam (MITI-V). According to the report, this group will emerge as the “New China” by 2020 given its abundant supply of cheap labour, favourable demographic profiles, and market and economic growth. And the World Bank echoed similar sentiments in a 2016 report.

But, there is obviously some challenges. there are mainly 3 key challenges –

1. The first is the gamut of internal problems. These are well-known and include numerous regulatory roadblocks, unfavourable land and labour laws, inadequate transport, communication and energy infrastructure, among others.

2. India faces stiff competition from South-East Asian and other South Asian countries which may be smaller in size but are better integrated into global supply chains. As, 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.

3. The most difficult—global technological and geo-economic changes. The former has led to an increasing quantum and quality of automation at every level of the manufacturing process. Robots are fast becoming the norm on factory floors, and it is only a matter of time before they take over today’s labour-intensive sectors.

Though the recent ‘Ease of Doing Business Report‘ of World Bank put India in 100th position which is 30 place above against the last year, which is a commendable achievement and also Moody’s Investors Service (“Moody’s”) has upgraded the Government of India’s local and foreign currency issuer ratings to Baa2 from Baa3 and changed the outlook on the rating to stable from positive (rating has been upgraded after a period of 13 years), But if we follow the EoDB report closely, then we can see India still lacks in four particular segments, that are – Dealing with Construction Permits, Registry Property, Enforcing Contracts and Resolving Insolvency and also look at the picture bellow.

The government aims to increase the share of the manufacturing sector in gross domestic product (GDP) to 25% from its current level of 15%, which now supports just 12% of the workforce. So the Government has taken some serious steps in this direction. Some of them are worth mentioning, like –

1. Its plan to reduce the corporate tax rate from 30% to 25% in the next four years, it is proposed to phaseout incentives, like accelerated depreciation limited to maximum 40%, limitation in deduction of expenditure on scientific research etc, sunset clause for income exemption for SEZ units etc.

2. To encourage innovation and technology in India which is the pillar for change, FM has proposed 100% profit linked incentive(subject to MAT levy) for specified start-up companies engaged in business involving innovation and technology (not applicable to LLPs). Income from exploitation of patent developed and registered In India will be taxed @ lower rate of 10% on gross basis.

3. The Government launched the New Foreign Trade Policy (FTP) in April 2015 with a focus on supporting both merchandise and services exports. FTP also introduced many schemes to reduce cost disability of exporters. The most important is the Merchandise Exports from India Scheme (MEIS). It seeks to reduce part of such costs for products with high export and employment potential in sectors like Food Processing, Chemicals,

Pharmaceuticals, Biotechnology, Defence, High Tech, Electronic Hardware, Automobile, Auto Components, Apparel & Textiles etc. MEIS thus compliments the Make in India initiative.

4. Recently, Union Cabinet approved a policy to give preference to local suppliers for government procurements. Only local manufacturer will be eligible for bidding the procurements which are less than 50 lakhs. The new policy will give a substantial boost to domestic manufacturing and service provision, thereby creating employment.

Conclusion :

India once left the pitch wide open for China to enter and to become global manufacturing hub, and China did that very well. So now when China is is trying to undertake a transition from an export- driven economy to one focused on domestic consumption, whether or not India can emerge as the next factory of the world is a question worth billions of dollars.

Source:

1. Livemint

2. The Economic Times

3. Deloitte

4. IBEF

5. PRS India

6. PIB

7. Indian Express