Perils of Modi’s manufacturing-led growth strategy

Dr Bharat Jhunjhunwala
Manufacturing sector is in decline globally. The Global Index of manufacturing output declined from 51.9 in May to 51.3 in June. An index of 50 or above indicates increase while below 50 indicates decrease. Decline of the index means that the sector is slowing down just as the train slows down before reaching the station. The indices of new orders, employment and output prices have likewise declined in tandem. China is equally affected. Decline of manufacturing is one of the main reasons for the decline of the share markets in that country in the last few months. We are not far behind. The Index for India showed a steep decline from 52.6 in May to 51.3 in June. Modi is trying to develop India as a global manufacturing hub in such a difficult situation.
Some progress is indeed seen. Multinational Corporations (MNCs) like General Electric, Bosch, Panasonic, Samsung, BMW, Scania and Xiaomi have made plans to manufacture in India. These investments will, however, not fulfill Modi’s dreams because there are many roadblocks in the path. First roadblock is that wages in India are rising and the advantage from low wages is increasingly evaporating into thin air. A study done few years ago gave minimum wage for Cuba as Rs 25, Bangladesh as Rs 46 and Kyrgystan as Rs 61 per day against Rs 128 for India.  So MNCs may go to these countries instead of India if cheap labour was our strength. This comparative advantage of ours is also disappearing because of automation. Professor Ravi Aron of Johns Hopkins University says, “In industry after industry, we have seen automation in the form of robotic production, digitization of business processes and precision manufacturing techniques. Manufacturing is returning to the U.S.” The number of workers required to run a factory is constantly declining. It is profitable for a MNC to manufacture in the US for the US market since it has to employ only a handful of workers. This elimination of labour is happening in India as well. I know of a sugar factory that used to employ 2000 workers to produce 2000 bags of sugar a day forty years ago. Today it is employing 500 workers to produce double the amount of sugar. Operations such as unloading sugar cane, feeding bagasse into the boilers and running centrifugal machines have been fully automated. The days when MNCs made a beeline to China to take advantage of its low wage rates are gone. Manufacturing will be increasingly undertaken near the markets so as to reduce the transport costs. So India may, at best, manufacture for India, but it is unlikely we, or any other country, will ever manufacture for the world as China did in the last two decades.
Second roadblock is that share of manufacturing in the global economy has been consistently declining. The share of agriculture in the developed countries is around one percent, share of manufacturing is around nine percent and that of services is about 90 percent. World over it is seen that share of services increases as the level of income rises. A rich person may buy maybe 20 pairs of clothes but he cannot keep on buying thousands of pairs. On the other hand he can make innumerable visits to tourist areas, go to massage parlours, buy computer games’ softwares, etc. The demand for services will continue to increase while that for manufactured goods will reach a plateau. Hankering after manufacturing is like trying to jump on to a sinking boat.
Third roadblock is that of a global glut in manufactured goods. China has “overinvested” in manufacturing. Its factories are lying idle. The decline in China’s growth rate in the last two years is mainly because it is unable to export the goods because of declining global demand. Trying to make a place for ourselves in the global market is like trying to enter a Second Class railway compartment that is already jam packed with passengers; or like driving a trailer through the weekly street market.
Fourth roadblock is the lack of land and electricity in India. We have four times the population and one third the land of the United States. We cannot divert agricultural land for putting up industries because that will hit at our food security. The huge resistance to the amendments proposed by Modi to the Land Acquisition Act are an indicator of the unavailability of land. We also do not have electricity. Our reserves of coal are expected to last for only 150 years. We do not have large sources of uranium. Our potential of hydropower is difficult to exploit because of the huge cultural value of rivers like Ganga and Narmada and environmental damages. It is difficult for us to provide electricity to the new industries that may be set up. Modi is trying to climb the wrong tree in his efforts to push global manufacturing in India. The effort is destined to fail.
Modi must focus on the development of services sector instead. This sector includes diverse services like architectural designing, translations, legal research, movies and music, and tourism. The sector does not suffer from the four roadblocks enumerated above. Success in the services depends upon the high level of skills, not on the low level of wages. Bangladesh will be able to compete with us in services only if it can impart the required education to its workers. Developed countries are also unable to compete with us on this count. President Obama, for example, has repeatedly drawn attention of the Americans that they are unable to compete with Indians in mathematics.  The second roadblock was of declining share of manufacturing. This tendency becomes an asset in the services sector the share of which is increasing. The third roadblock was of a global glut of goods in the international market. Indeed, countries like Philippines are giving us stiff competition in areas like Call Centers. But this can be overcome because new services are being created everyday. For example, computer games were not known to exist two decades ago. Global competition  can be faced by getting into new genre of products such as space travel, astrological advice, aroma therapy and acupuncture.
The fourth roadblock was of unavailability of land and electricity. The services sector requires a fraction of land of that required by manufacturing. The electricity consumption in services is about one-tenth of manufacturing for same amount of output. Bureaucrats running the country from the PMO, however, do not like the services sector because there are few opportunities for making commissions here. Manufacturing provide such opportunities aplenty in land acquisition, electricity connection, pollution control, excise duty and so on. The bureaucrats are leading Modi and the country into the dumps in pursuit of their vested interests.
(The author was formerly Professor
of Economics at IIM Bengaluru)


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