Column: US is re-industrialising, India isnt

Written by Arindam K Bhattacharya | Updated: Dec 27 2013, 08:50am hrs
Let me share three recent conversations I was involved in. At an international summit last month, I was part of a group which was discussing the key trends shaping global manufacturing value chains. The Chinese participant, a senior member of their textile industry association, said that apparel exporters in China are shifting their manufacturing capacities to other low-wage countries like Bangladesh and Vietnam as wage costs in China are growing faster than productivity gains.

The second conversation was with a BCG colleague from the US who was describing the plans of a US manufacturing company making hi-tech valves and pumps to bring much of their offshore production capacity back to the US. When I probed the rationale for this move, he said that the company was expecting the productivity-indexed wage rates in the US to become very competitive by 2015, and more importantly they were betting that by leveraging digital technology in both product design and production they could reduce total life-cycle costs to levels which would make them more competitive than peers from emerging markets.

These two conversations point to the two game-changing trends shaping the world of manufacturing, one that is led by China, the factory of the world where labour rates are increasing fast, and the other by US, the consumption centre of the world where manufacturing companies are looking at exploiting the power of digital technology to develop completely new business models to compete. The rest of the world, including India, thus have a narrow window of opportunity to reposition themselves in this fast-evolving global manufacturing environment before the trends settle down and repositioning becomes more challenging.

But what are we doing to exploit this window of opportunity The government had approved a manufacturing policy which has set an ambitious target of increasing the share of GDP from 15% to 25% and create 100 million manufacturing jobs by 2020. The 12th Five-Year Plan for industry details the challenges in achieving this aspiration and proposes many new initiatives and policies. The recent speech by Rahul Gandhi at an industry meet clearly articulated these challenges, from reviving the investment cycle, simplifying business regulations and clearances to bring in more transparency, finding solutions to the vexed issue of making it easier to acquire land for industrial development, and most importantly and probably a first for a senior political figure, admit that we need to develop an efficient and flexible labour market if we want to create more manufacturing jobs.

So, if the government set an aspiration, knows the issues that have to be addressed, and is implementing the manufacturing policy with landmark initiatives like the National Investment & Manufacturing Zones (NIMZs), then why our manufacturing growth rates, which have plummeted over last few quarters, are refusing to show strong signs of revival

Because there is a huge gap between good intentions and policymaking and implementation on the ground. This is where my third conversation points to some answers. This conversation was with a senior government official in one of the manufacturing ministries. When I asked him this question on what is stopping him pushing through the proposed initiatives to revive manufacturing sector, he said two things are holding us back. First, the responsibility for manufacturing sector is divided among multiple ministries (steel, textile, heavy industry, fertilisers and chemicals, and so on). Not only this, the factors of production like land, power or labour or raw materials like coal and iron ore are also handled by different ministries, and each ministry has its own agenda and set of priorities which can only conflict with each other, and they can even confuse a logical person as to what objective we are trying to fulfil. Second, he said that the governance model to align these multiple ministries and agencies are weak or broken and hence policies often remain on paper and implementation does not happen.

That is the reason why Indias share of global exports in labour-intensive textile industry, an industry which can generate millions of new jobs, has remained stagnant around 3-4% over the last two decades while Chinas share has increased from less than 10% to nearly 35%from $10 billion to over $150 billion. Now, part of this export capacity is moving out of China but not to India, and even a latecomer like Vietnam, which started exporting only in 2005, has built a share of 3.5% of global exports. That is the reason why, despite having an offset policy for defence procurementa policy that is governed by the ministry of defencewe have not been able to translate the huge defence procurement into creating significant manufacturing capacity and jobs in India.

One is encouraged by the recent unanimity that one now sees among the different political parties on the importance of the manufacturing sector and increasing its share of GDP. We have come a long way since the days when we declared that we will bypass the industrial phase and move directly into a service economy. But if we want to make progress towards this aspiration for the manufacturing sector, we have to move beyond innovation in policymaking and also innovate our governance model of implementation of these policies. Innovation is what will set aside the individual interests and align the actions of different central ministries and those of the state governments to make implementation happen. A cynic will say that this is a tall order given our recent history, but if there is one new year wish from me, I would say this is the one wish worth fighting for.

The author is managing director, the Boston Consulting Group, India. Views are personal