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View: Can manufacturing be the messiah?

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The cost of doing business in India is still very high. That means that even if the residual of low technology manufacturing moves out of China, India is unlikely to benefit.

View: Can manufacturing be the messiah?
The spate of downgrades for India’s projected growth rate continues, the latest being IMF that reduced India’s expected growth in 2021-22 substantially from 12.5 percent to 9.5 percent. This follows a massive contraction of the economy by 7.3 percent in the last fiscal year. This, obviously, raises a concern about the speed of recovery of the economy in the short run. However, there is also a big concern about the long-run prospects of the economy that we cannot brush away.
There are not many economies of notable size outside of North America and Western Europe that made it into the high-income category. The few exceptions are in Asia, including Japan, South Korea and a few island nations. China is not there yet, and India is barely in the low-middle-income group. But, there was hope: Hope that India will be able to do it – provide decent living standards of the billion-plus population, pull millions out of poverty, end malnutrition, prevent millions of untimely deaths. The question is can India still do it?
The government is relying heavily on the industrial policy of increasing manufacturing output and attracting manufacturers to relocate to India. In particular, it is betting heavily that manufacturers will move out of China, and India can attract some of them. But, its hope might be misplaced. It is true that the global economy, which has over the last four decades or so relied heavily on low-cost low-quality products from China, is undergoing a sea change. Some of it is driven by global geopolitics in which we are likely to see a sustained rivalry between the USA and China over the foreseeable future. However, much of the change is driven by the rapid demographic change that China underwent and the technological change that we are witnessing across the globe.
In 1978, when China opened up its economy, the old-age dependency ratio was 7.67. There was a massive supply of the working-age population. They were not skilled, the mean years of schooling stood at less than four years and enrollment in tertiary education was 1.1 percent in 1980. The Chinese currency saw steady depreciation till 1994 and was held at that level till 2005. This meant China could produce primary commodities or low technology products in large quantities and supply them to the world at a very cheap price. For instance, the export of textiles from China soared in the 1980s. On the other side, in the USA, in the 1980s, there was a great will to keep inflation low. The US economy also saw steady growth during that period of Great Moderation starting from 1984. That meant the US economy and the Chinese economy complemented each other and both benefited from their trade relationships.
The situation now is vastly different. The one-child policy in China meant that the Chinese population has aged rapidly. The old-age dependency in 2020 was 17.02 and the working-age population is shrinking. They are also much more skilled. The mean years of schooling has more than doubled and enrollment in tertiary education is more than 50 percent. The currency has appreciated since 2005. The composition of trade has also drastically changed. The top export from China in 2019 was broadcasting equipment followed by computers and integrated circuits. So, is China abandoning manufacturing? The answer is emphatically no. China is still a big manufacturing powerhouse and it is still keen on manufacturing, just that it is gradually transforming into manufacturing products with a high technology component.
However, that does not mean exodus of low technology production because much of the shift has already happened to countries like Bangladesh and Vietnam. And, more importantly, the world might just be losing its appetite for cheap low-quality products with rising inflation and changing consumption patterns across the globe. The competition across countries is now about high technology manufacturing. And, the recent fault lines in the production chain caused by the shortage of chips has made this urgent. USA is also in this game and is making heavy investments. Thus, there is a change in the relationship between US and Chinese economies, it is now entering a stage where potentially they are in competition.
Where does that leave India? India does have a large base of working-age population, but they are not very skilled. The mean number of years of schooling in India is still about six years only, which could have been attractive for low technology manufacturing. However, the cost of doing business is still very high. That means that even if the residual of low technology manufacturing moves out of China, India is unlikely to benefit. And, given the low skill levels, it is unlikely to attract high technology manufacturing. This is evident from the fact that there is no fab plant in India, and it is very unlikely that a full-fledged fab will be set up anytime soon. So, it is really hard to see large-scale manufacturing being the messiah for India’s large workforce looking for a ticket to a decent life. If the government tries to force this through high tariffs and other protection measures, it might cost the economy more with consumers paying high prices for low-quality products.
So, what can India do? There has to be a two-pronged approach, one for the short term and another for the long haul. In the immediate future, we will have to play to our strengths, which is services. With the world moving towards a digital future, India can truly become the back office of the world. There is another area where we can potentially excel given our distribution of skills, it is manufacturing services. It is possible to support manufacturing across the globe through design, test and validation, automation, user experience, research, analysis, etc. This can be the path to high technology manufacturing in the future. What is the role of the government in this? It has to urgently get the laws and policies around IT and data right to balance the needs for privacy, data protection, security, openness and industry needs.
What needs to be done for the long run is far clearer, but no less urgent – invest heavily in education and skilling. While the private sector has a big role to play in this, the governments, both at the state and centre, will have to do a lot to ensure the citizens have a shot at escaping the low-income trap. This must start from school education, both in terms of quantity, but also very importantly in terms of quality. If this happens, then there is still hope.
The author Dr Partha Chatterjee is Professor and Head, Department of Economic at Shiv Nadar University, Delhi-NCR. The views expressed are personal.
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