The effects of years of rapid growth are being felt increasingly in China’s manufacturing sector. 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.

Low-cost production jobs, especially in the apparel, toys and cheap electronics sectors, are now moving out to other countries, mostly in South and South-East Asia, which have a steady supply of cheap labour. There is research to suggest that India could potentially be one of the countries to benefit from this realignment in manufacturing trends.

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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.

These are intriguing possibilities. The government aims to increase the share of the manufacturing sector in gross domestic product (GDP) to 25% from its current level of 15%, supporting just 12% of the workforce. But there is a considerable gap between India’s manufacturing potential and its realization. After all, the United Progressive Alliance had set up the National Competitiveness Council in 2004 with similar aims, to little effect. And that wasn’t the first time the government of the day has missed the bus on this issue.

The ‘Mighty Five’—Malaysia, India, Thailand, Indonesia and Vietnam—will emerge as the ‘New China’ by 2020 given its abundant supply of cheap labour, favourable demographic profiles, and market and economic growth

There are three key challenges. 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.

A combination of these internal problems has also caused a structural imbalance: Small and medium enterprises, not large factories, dominate the Indian economic scenario. About 131.29 million people are employed in as many as 58.5 million establishments, according to the sixth economic census released last year. Some of these enterprises are “babies" that can be scaled up but many may be “dwarfs" that will not grow. If India has more dwarfs than babies, this will prove to be a serious drag on its manufacturing potential; only large enterprises have the economies of scale that can make India truly competitive.

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Second, 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. Indeed, the Economic Survey 2016-17 sounds a warning here. It starts by noting that “India is well positioned to take advantage of China’s deteriorating competitiveness", particularly in the apparel and footwear segments. But it goes on to say: “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."

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

The third challenge is perhaps 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. The latter, meanwhile, points to greater trade protectionism and shortening global value chains—both inimical to the sort of manufacturing success China has enjoyed.

It has been argued that India should not be locked into becoming a low-cost manufacturing hub—the world’s shop floor, as China is sometimes pejoratively called—but shoot for high-value manufacturing and innovation.

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This, however, is not a binary choice. The latter is important—but the jobs needed to keep pace with a young population as vast as India’s, and with its depressing socio-economic indicators, cannot come entirely from the top end of the manufacturing value chain. Low-cost manufacturing is important for India. To harness the opportunity, the present government—and its successors will have to deal with a complicated tangle: internal reform; deft diplomacy and trade negotiations; and the vexed question of how to deal with the jobless growth that automation will bring, diminishing the advantage of labour arbitrage. It will not be easy.

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