The government has identified making India a manufacturing hub as a priority area. India made too quick a transition from an agricultural economy to a services economy, without a significant growth in industry. The proponents of this thought argue that many developed economies have had a strong manufacturing component before evolving to be a services-led economy. Given this background, let us examine the possibilities in the context of IT/electronics manufacturing, as it is considered a growth engine.
Electronics/IT hardware manufacturing can be divided into volume and value manufacturing. Volume manufacturing characterised by high volume of production is associated with consumer goods production, requires relatively low-skilled labour, and even where skill is required, workers can be quickly trained. At the low end, this could be the ‘assembly line’ manufacturing. On the other end is value manufacturing, characterised by ‘patent-protected’, latest cutting/bleeding edge technological advancement.
Volume manufacturing is often labour intensive. China is the world leader in this and, hence, there is a feeling in the policy-making/industry circles that we need to be competing with China for such factories and jobs. But, in reality, this may not be the case. We might actually be competing with some African countries. China’s average manufacturing labour cost is above $500 per month, as per National Bureau of statistics of China. According to another estimate, close to 85 million jobs will be shed by China in the coming years because of fast rising wages of unskilled workers. Some Chinese manufacturing companies have started looking at other countries like Ethiopia for offshoring manufacturing. In effect, India might be competing with some of those countries.
India will be one of the top countries in terms of labour force over the next two decades. So, if India becomes successful in riding a volume manufacturing wave, it can reap significant benefits in terms of job creation. However, there are a few risks. One aspect of volume manufacturing jobs (especially low-end) is that these jobs tend to move around the globe. These jobs move from a higher cost country to a lower cost country and, in the mid-term, drive up labour costs in the country and then move on to another country where costs are lower. Indian economy has a unique feature that though agriculture as a percentage of GDP is falling over the years and is at around only 13.7%, agricultural sector still employs 50% of the workforce. If India is successful in bringing volume manufacturing jobs, policy-makers need to plan for the inevitable rise in labour costs and its potential impact on the agricultural input costs.
India needs to attract value-based manufacturing investments from a long-term perspective, while planning to ride on the volume manufacturing during the short to mid term. We are at an interesting phase of the 21st century where we might see automation taking over many human tasks. Rapid improvement in technology means industrial robots will soon be able to take over many of the roles in the manufacturing sector, hence making human jobs redundant. Given the Indian ingenuity in the IT and ITeS sector, India should position itself as a key player in the technology-driven paradigm shift taking place in manufacturing.
By Balaji Mahalingam
The author is research director, IDC South Asia