Why India Can't Leapfrog Past Factories
(Bloomberg View) -- One of the most striking ways in which Narendra Modi’s government has changed the policy narrative in India is to make manufacturing central to its ambitions. This is an overdue recognition of the fact that India -- whose workforce is overwhelmingly poor and underemployed, and growing at the rate of a million people every month -- needs to create mass factory jobs if it's to prosper.
Yet a growing chorus of voices has begun attacking this emphasis on manufacturing, arguing that the government shouldn’t waste political capital and energy on the reforms needed to build up the sector. According to these pessimists, the politics are too hard and the economics -- at a time when global trade is slowing and robots are supplanting workers everywhere -- don’t make sense.
At best, this criticism is irrelevant -- an argument imported from the developed world, where stoking fears about the future of manufacturing has become a small but thriving industry. At worst, it's dangerous.
Take the concerns about the state of world trade. China ramped up its export-oriented manufacturing push at the beginning of this century, after its accession to the World Trade Organization; fortuitously, between 2000 and 2007, world trade doubled. India faces a much bleaker climate. The Baltic Dry index is pushing historic lows, and demand in major Western markets is anemic. Overcapacity in China means that new entrants to the sector now face stiff competition.
These arguments should indeed scare existing players and exporters (including some in parts of China) who are struggling with rising wages. But India is an underemployed nation that claims an infinitesimal proportion of world trade, especially when compared to its size and potential. It contributes barely 1.5 percent of world exports. China’s share is pushing 14 percent.
Like every other low-wage economy throughout history, India should be conspiring to steal someone else’s share of the export pie, not worrying whether there's enough to go around. This is what Vietnam and Bangladesh, for example, are busy doing. India, too, needs to focus on doubling its share of world trade in a few years -- regardless of how fast or slow that trade is growing.
Then there are the worries about the future of manufacturing. Many of them are legitimate, of course. But to hear some in the West tell it, you’d think that the robots are a few months away from stealing every single manufacturing job on the planet. In fact, even pessimistic projections assume that it will take several decades for that to happen -- and the wages of Indian workers are low enough that theirs should be among the last jobs that are automated. And, even if these Employment Terminators eventually make every single factory job irrelevant, the skills young Indians gain now are what will keep them productive in the future.
It is absurd to imagine that a technological revolution still decades away from completion could be a persuasive argument against creating an Indian manufacturing sector today. All across India's northern states, a generation of young people -- overwhelmingly young men, thanks to Indian parents' bias against girls -- need jobs now, a million a month by some estimates. If they get them, they will make India rich before they age out of the workforce. If they don't -- well, a millions-strong army of angry and disconnected young men is the stuff of nightmares.
The idea that services can fill the gap is wishful thinking. Low-skill services don't provide steady employment and the security that gives rise to entrepreneurship and education -- and eventually, a modern middle class. Meanwhile, high-skill services don't fit the profile of India's badly educated labor force. So far the country's services export sector has created barely a million jobs in total.
What make the anti-manufacturing movement in India most puzzling are the policy reforms it argues against. What's required for "Make in India" to succeed? The government needs to ensure that the Indian labor force is flexible and skilled enough to learn quickly on the job. It needs to make it easier for entrepreneurs to get land and credit to set up factories, and for small businesses to scale up. It needs to help plug Indian markets into one another other and into global markets. It needs to put quality infrastructure -- whether physical or digital or regulatory --– into place to help factories access global supply chains efficiently.
These same reforms would be needed even if the manufacturing pessimists were right in every essential; they're the same reforms required for India to succeed in any post-manufacturing, digital-first world. The skeptics have pulled off the amazing feat of being wrong even if they're right.
There are certainly many grounds on which to criticize the Modi government. Too many reforms are being put on the back burner, or have been poorly implemented. But let’s not criticize its priorities. It’s got those exactly right.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story: Mihir Sharma at email@example.com.