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India's growth hinges on the factory floor
Reuters - June 12, 2011
The company self-generates up to 40 percent of its power, scrambles to find and retain staff to operate increasingly sophisticated machinery, and must ride herd over a stretched supply chain struggling to keep up with demand – all typical of challenges faced by the country's manufacturers. "It's very difficult to find skilled labor," Nanda said.
Heavily reliant on services, India must shift economic gears toward manufacturing if it is to maintain near-double digit growth and, more importantly, absorb the more than 10 million people set to join the workforce annually in the coming years.
While New Delhi is aware of the challenge and aims to lift manufacturing's share of the economy to 25 percent over the next decade from about 16 percent now, getting there looks daunting. Infrastructure is improving but remains poor, the country suffers from a costly talent shortage despite its 1.3 billion people, labor laws are restrictive, land acquisition is difficult and red tape and corruption are rampant. Supply chains are underdeveloped, capital tends to be expensive, and conditions vary dramatically between states.
Those constraints mean most manufacturing operations in India are small and unable to exploit economies of scale.
"If you look at the growth of manufacturing in the NIEs [newly industrialized economies], if you look at it in China – it all came from one very strong source, which was mass-manufacturing," said Sanjay Mathur, economist at Royal Bank of Scotland in Singapore. "You're still lacking that in India."
In its favor, India boasts a vibrant corporate sector, a huge domestic market and a favorable demographic outlook that, with better training, education and government policies, could turn it into a global force in manufacturing.
"There has to be a fast tracking on all these fronts – on labour, on policy-making, on clearances," said Nomura economist Sonal Varma. "At this stage it does not look like we have done all that groundwork."
India's software sector is world class, leveraging lower costs to export services from high-tech hubs such as Bangalore and Hyderabad to the US and Europe.
That success has fueled the notion that India might make the jump straight from an agricultural economy to one based on services, bypassing the manufacturing stage. That's a leap that no major economy has pulled off.
Manufacturing in India accounts for roughly the same share of its economy as peers Brazil and Russia, which unlike India are also big exporters of natural resources. By comparison, Thailand generates 40 percent of its output from manufacturing, while in China the figure is 34 percent. Services can't be the sole locomotive for the Indian economy in large part because the sector does not create enough jobs.
Services account for about 55 percent of GDP in Asia's third-largest economy but just 25 percent of employment. Agriculture accounts for about 15 percent of the economy, a share that is shrinking, but employs 58 percent of workers.
"India is going to add something like 150 million odd workers over the next 10 years," Varma said. "The employment elasticity in the services sector is not that much, which means the manufacturing sector has to absorb that."
A shortage of labor is often cited by manufacturers as the most troublesome bottleneck. "There is, for example, a huge scarcity in availability of civil constructors," said Armin Bruck, managing director of the Indian unit of German conglomerate Siemens, which employs 19,000 people in India and can spend as long as two years training a single employee.
The cost of failure will be slower growth. "In the absence of the manufacturing sector in India taking off, it's hard to see India maintaining a growth rate of 9 or 10 percent for a sustained period," said Jahangir Aziz, chief India economist at JP Morgan.