by Vivek Kaul
With such a level of central planning being the order of the day, it isn’t surprising that quality products and Indian businesses did not go together. This inability to produce quality products set us back in the export-manufacturing race. And we are still trying to get the manufacturing revolution going!
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In May 2015, The Times of India published a very interesting newsreport. It pointed out that over 60 per cent of the recently registered products with the Bureau of Indian Standards (BIS) were Made in China.219 This was basically seen as an effort on the part of Chinese manufacturers to conform to Indian standards.
These include electronic products like mobile phones, printers, power adapters, notebooks, tablets, and so on. What this tells us clearly is that a vast majority of the electronic products that we buy in India are not Made in India, but Made in China. In fact, a number of successful Indian mobile phone brands are just brands which directly buy the mobile phones that they sell from factories in China.
Interestingly, the last time I bought a television set a few years back, it came with a weird-looking plug, something that I had never seen before. It wouldn’t fit into the electrical socket at home. It took a helpful neighbour to solve the problem. He told me that I would need a converter to fit the plug into the socket. The converter cost me Rs. 25 and left me wondering why a company which sold a product worth Rs. 15,000 would inconvenience its customers for something worth as low as Rs. 25.
When I bought a smart phone a couple of years later, a similar experience awaited me. But this time around, I was prepared, and as soon as the smart phone was delivered at home (I had ordered it online), I went out and bought a converter, which then cost Rs. 20.
As you must have figured out by now, dear reader, both the products were Made in China. Not only are technology products which are Made in China flooding the Indian market, but there are other products as well. From electricity bulbs to thermometers, to Ganesha and Lakshmi idols for Diwali, to the different colours used for playing Holi and even Rakhis, all are now Made in China.
In fact, even aggarbattis (incense sticks) are now Made in Vietnam.220 This has been happening for some time now and is a worrying trend indeed.
There are essentially three ways in which a country escapes underdevelopment—geology, geography and jeans (a euphemism for low-skilled manufacturing). Geology essentially refers to countries exploiting their natural resources (endowed by geology) in order to improve their standard of living. Canada and Australia are two excellent examples of this phenomenon. In the recent past, countries like Chile, Brazil, Botswana, etc. provide some more good examples.221
Geography essentially refers to countries exploiting their natural beauty to develop tourism and, in the process, improve their standard of living. Island countries like Barbados (and other countries in the Caribbean) and Mauritius are excellent examples of this. In fact, within India, the state of Goa, which has the highest per capita income from among all states, is a good example of the same.
Then comes ‘jeans’, or essentially low-skilled manufacturing. Countries in South-East Asia (Malaysia, Thailand, Indonesia, etc.), China and South Korea initially relied on low-skill manufacturing (typically textiles and clothing) to improve their per capita income. As the Economic Survey of 2015-2016 points out: “Later on, they diversified into more sophisticated manufacturing, but ‘jeans’ offered the vehicle for prosperity early on. No country has escaped from underdevelopment using relatively skill-intensive activities as the launching pad for sustained growth, as India seems to be attempting.”
In fact, take the case of China. In 1980, China’s export share in the world market for clothing and footwear was 1.3 per cent. India’s share was greater than that of China, at 1.4 per cent. By 2007, the Chinese share had risen to 37.6 per cent. The Indian share had gone up to just 3.2 per cent. This has primarily happened because of India’s labour laws and due to several other factors (which we shall see later in the chapter) which do not encourage labour-intensive manufacturing. This has led to a situation wherein the Indian manufacturing sector has not been integrated into global supply chains.222
As the World Trade Report for 2013 points out:
A central feature of this… age of globalisation is the rise of multinational corporations and the explosion of foreign direct investment (FDI)…. By 2009, it was estimated that there were 82,000 multinationals in operation, controlling more than 810,000 subsidiaries worldwide. Upwards of two-thirds of world trade now takes place within multinational companies or their suppliers – underlining the growing importance of global supply chains.
This is something that India has clearly missed out on.
One of the reasons India has missed out on being a part of global supply chain networks is because there are very few firms that carry out labour-intensive manufacturing. And this has happened because the country has never got around to encouraging labour-intensive manufacturing, which can give firms economies of scale in areas like garment manufacturing, where there is cut-throat competition from other countries.
Encouraging low-skilled manufacturing to create jobs is a rather obvious insight which Indian politicians and policymakers have not understood over the years. The economic development strategy of a nation needs to align itself with its natural competitive advantage, which, in the Indian case, is the large pool of unskilled labour which is already available and, at the same time, is continually entering the workforce all the time.
In fact, even when the Make in India programme was first launched, the bureaucrats responsible for it were talking about setting up advanced factories in areas like solar-powered appliances and military weapons. This needs highly skilled people, which India does not have. What the country needs are factories which manufacture toys and textiles.223 Thankfully, the Modi government has started to understand this, and in June 2016, it carried out some labour law reforms in the textiles sector (which shall be discussed in Chapter 7).
The point is that no country has gone from developing to developed without the expansion and success of its manufacturing sector. As the Cambridge University economist Ha-Joon Chang writes in Bad Samaritans—The Guilty Secrets of Rich Nations and the Threat to Global Prosperity: “History has repeatedly shown that the single most important thing that distinguishes rich countries from poor ones is basically their higher capabilities in manufacturing, where productivity is generally higher, and more importantly, where productivity tends to grow faster than [in] agriculture and services.”224
The Indian manufacturing sector cannot flourish with the most basic of products being Made in China. For a while, there was great hope that India did not need to go through a manufacturing revolution to pull its citizens out of poverty and that the information technology-led services revolution would perform that miracle.
But it can safely be said that that hasn’t turned out to be the case. The simple reason for this lies in the fact that information technology companies employ highly skilled individuals. The net hiring in the information technology sector has remained stagnant, at 2.5 lakh individuals per year, for the past few years.225
In fact, if we ignore the numbers hired by the Business Process Outsourcing (BPO) sector, the number of individuals recruited by the information technology companies during the course of the financial year ending on March 31, 2015 stood at 2.1 lakh.226 Hence, the point is that when close to a million people are entering the workforce every month, a sector hiring 2-2.5 lakh individuals during the course of a year cannot solve India’s job problem.
What has not helped is that similar booms have occurred in neighbouring countries like Sri Lanka and Pakistan. The Philippines has a booming call centre industry, employing 3,50,000 individuals, which competes with Indian companies.227
There are two points here. One is that India has competition in the information technology services space from neighbouring countries. And, more importantly, the services sector cannot create enough jobs to absorb both the new workforce and, at the
same time, the workforce that needs to be moved from agriculture to other areas. The output of the information technology sector amounts to a significant 2.5 per cent of the Indian GDP. Nevertheless, it doesn’t create many jobs. Over the last ten years, the information technology sector has created around 15 lakh jobs in India. If we continue to be optimistic about the sector, it will perhaps create another 15 lakh jobs over the present decade. And that isn’t enough by any stretch of the imagination.228
Also, the information technology sector employs skilled individuals, i.e., graduates, engineers, MBAs, and so on. The information technology companies do not directly create jobs for low-skilled people, who have only primary education or, at best, secondary education. Of course, they do create jobs indirectly. Whenever an information technology company sets up a new office, it creates all kinds of jobs, from construction jobs to drivers, to cleaners, to cooks and maids, and so on. But that also does not help beyond a point.
This is true about other highly productive sectors within the broader services sector as well. In fact, firms operating in finance, business, telecommunication, knowledge and technology form around 25.3 per cent of the GDP. Yet they make up for only 2.2 per cent of the total employment.229
What India needs are industrial blue-collar jobs, where most of the training is received on the job.230 In fact, it is only this which can help create jobs for the one million Indians who are entering the workforce every month. In Chapter 4, we saw that there are multiple estimates which suggest that around one million Indians are entering the workforce every year and are likely to continue doing so until 2030.
Nevertheless, it needs to be pointed out here that there are certain assumptions being made while arriving at the one million figure and those assumptions could turn out to be wrong. Data from the National Sample Survey Organisation (NSSO) suggests that India has a labour force of 48.4 crore individuals. This forms 40 per cent of the population (assuming a population of 121 crore, as per the 2011 census). This ratio is referred to as the labour force participation rate of the country.231
The trouble is that, at 40 per cent, the ratio is too low. The main reason for this is that the labour force participation ratio is typically calculated for the total number of people in the 15-59 years of age range. India has 73 crore people in this age range. Taking this into account, the labour force participation rate of India comes to 66.3 per cent (48.4 crore expressed as a percentage of 73 crore). This basically means that, of the 73 crore people in the age range of 15-59 years, 48.4 crore are actively seeking employment.232
Furthermore, India’s workforce is predominately male. The labour force participation rate of males stands at 94 per cent and that of females at 37 per cent.233 What is interesting is that the female labour participation rate has fallen in the recent past. Experts have been baffled by this and have attributed it to women spending more time on education and skill development, faulty data and the minimum wage guarantee programme (the Mahatma Gandhi National Rural Employment Guarantee Scheme) launched by the Congress-led United Progressive Alliance government.234
The point is that, at 37 per cent, the female labour participation rate is way short of that of China, which is at 64 per cent.xi Nevertheless, as has been observed the world over, as fertility rates continue to fall (i.e., fewer babies born per woman), more and more women enter the workforce. South Korea is a very good example of this. As fertility rates fell over the decades, a greater proportion of women entered the workforce.235
The point being that if the Indian female labour force participation rate starts to go up in the years to come, then the assumption of one million Indians entering the workforce every month might turn out to be an underestimate. As Akhilesh Tilotia writes in The Making of India: “If… a larger percentage of women in India aspire to work, it could increase… the number of people looking for work every year to around 20-22 million.”236
The economist Vijay Joshi refers to the female labour force participation rate as ‘the chief joker in the pack’.237 If the female labour force participation rate starts to go up, as it very well should, then India might end up with an even bigger problem on its hands.
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In 1987-1988, the share of manufacturing (which is a part of industry) in the overall Indian GDP crossed 15 per cent for the first time. It was at 15.01 per cent. The share of manufacturing in the GDP crossed 16 per cent in the mid-1990s. It hit a high of 16.6 per cent in 1996-1997. It fell below 16 per cent after this, and crossed 16 per cent again in the 2000s, only to fall again. By 2013-2014, the share of manufacturing in the Indian GDP was back to below 15 per cent. It was at 14.94 per cent.
In January 2015, India moved towards a new method to calculate its GDP. As per this method, the share of manufacturing in Indian GDP had jumped to around 18 per cent between 2011-2012 and 2013-2014. For 2014-2015 and 2015-2016, the figures were a little lower, at 17.1 per cent and 17.5 per cent, respectively.
Many doubts have been raised about this new method of calculating the Indian GDP. The suggested increase in the share of manufacturing in the GDP is not met with by much evidence on the ground. A detailed discussion of this issue is beyond the scope of this book. Hence, I will work with the assumption that manufacturing forms around 15 to 16 per cent of the Indian GDP and that is where it has been for nearly the last three decades. Now compare this with several countries in Asia, where manufacturing accounts for more than 20 per cent of the GDP. In Thailand, it is at 34 per cent. In China, it is at 32 per cent. In Malaysia, Indonesia and the Philippines, it is at 24 per cent, 24 per cent and 31 per cent, respectively.238
Hence, the Indian share in global manufacturing has barely moved over the last few decades. In 1993, India had 0.9 per cent of the global manufacturing. In comparison, China had a 3.1 per cent share. By 2009, the Indian share in global manufacturing had increased a little to 2.2 per cent. By contrast, the Chinese share had jumped to 17.3 per cent. By 2013, the Indian share had dropped to 2 per cent of the global manufacturing, whereas the Chinese share had jumped up to 24.1 per cent.239
Hence, over the past 23 years, China has really managed to capture (for the lack of a better word) close to one-fourth of the global manufacturing space, while India has moved at a snail’s pace. This can also be made out from the fact that India’s share of global merchandise exports had moved from 0.5 per cent to 1.7 per cent between 1993 and 2013. During the same period, China’s share had jumped from 2.4 per cent to 11.5 per cent.240
A study carried out by the Emerging Advisors’ Group, a Hong Kong-based research firm, found that sustained growth in the export of manufactured products was the single most powerful driver of economic booms. The export of simple manufactured products (or jeans, as we saw earlier) increases the income as well as the consumption within the country. At the same time, it helps the country earn precious foreign exchange, which can be used to import the machinery and materials required to improve the factories which make goods which could be exported.241
Typically, a country first goes through a manufacturing revolution, and only then does the services revolution kick in. The way it works is that once factories pop up around cities, services spring up to cater to the individuals working in these factories. As the middle class grows, restaurants and insurance companies emerge.242
This is typically how it is supposed to work. The share of industry in the economic activity of a country first goes up and then comes down as the services take over. As the Economic Survey of 2015-2016 points out: “It is a stylised fact that the process of development includes stages of industrialisation followed by de-industrialisation: a country first experiences a rising share of resources – especially labour – devoted to the industrial sector, after which the services sector becomes more important, so that the share of employment in the industrial sector declines from its peak.”
India, on the other hand, has gone precisely the other way. In the mid-1950s, six decades ago, agriculture formed nearly half of the Indian GDP. Industry formed aro
und 18.1 per cent of the GDP, manufacturing (a part of industry) formed around 10 per cent of the GDP, and services, 29.6 per cent. As the share of agriculture in the Indian GDP fell, it was taken up more or less equally between industry and services. By 1980-1981, agriculture was down to 35.7 per cent of the GDP. The share of industry in the GDP had increased to 25.7 per cent, whereas that of services had increased to 37.7 per cent. Hence, the fall in agriculture’s share in the GDP was more or less split between industry and the services. The share of manufacturing had jumped to around 14 per cent by 1980-1981.
After 1980-1981, things started to change, and the services started to take over. In the 1990s, the exports of information technology companies (which show up under the services exports) added to this trend. By 2013-2014, the share of agriculture in the economy had fallen to 13.9 per cent. Industry’s share was at 26.1 per cent, in comparison to 25.7 per cent in 1980-1981. The share of manufacturing was at 14.9 per cent. Hence, the share of agriculture in the overall economy has fallen majorly since 1980, whereas the share of industry as well as manufacturing has more or less been flat. At the same time, services in 2013-2014 formed around 59.9 per cent of the economy.
So, in this sense, India has been unique. The Indian experience has been in line with that of many sub-Saharan countries.243 Indeed, this is a worrying trend. In fact, manufacturing as a share of the GDP peaked in 1996-1997 at 16.6 per cent. This is also reflected in the state-level registered manufacturing data. Registered manufacturing is essentially defined as factories which have more than ten workers.