As China?s wage competitiveness decreases, India can become the global manufacturing capital

Last month I was in China and had an opportunity to discuss and understand the ?second transformation? of their economy to move from an (1) export to domestic market focus, (2) investment to consumption led GDP, (3) low-end to high-end/innovation-driven manufacturing, and (4) high growth at all costs to moderate growth with better distribution. Rather than use the global economic slowdown to explain away all the problems faced, the Chinese seem to have used it as a trigger to launch this major transformation of their economy. I suspect two other factors also drove this change of direction. First, the large-scale infrastructure build-out ahead of demand in the last two decades is ?playing out? as a strategy with growing challenge in servicing the large debt fuelling these investments. Second, the wage rates in their industrial zones have grown very rapidly in last few years (their minimum wage rate has doubled) eroding manufacturing competitiveness for exports.

I was particularly struck by the impact of the wage increase in China in a recent study we did for a European client on sourcing of toys. China is well known as the toy capital of the world, manufacturing about 75% of all toys sold globally. When we started the study our going-in hypothesis was that while China?s competitiveness may have eroded a bit due to increased labour cost, it was still the most cost-competitive location to source toys. Our analysis painted a different picture and we found that the increase in China?s wage rates has potentially made them 15-20% more expensive as a location compared to costs in a comparable cluster in India even for a product like toys. The client had mandated us to look at India as a part of its risk mitigation strategy of diversifying its supply base from China and here we were telling them that India makes sense not just to mitigate risk but also because it is cheaper for certain types of toys!

Clearly, a fundamental shift in cost competitiveness is under way with major implications for all manufacturing economies. The race is on to become the next ?manufacturing capital of the world? as China adjusts its economic path. India, with the second largest and growing labour force, has a remarkable window of opportunity to fill this role?if it moves fast and gets all the pieces of the puzzle right. However, this opportunity could not have come at a worse time for the country. The economic growth and investments have slowed down, its sovereign rating outlook has been downgraded, foreign investors are feeling unwelcome and, as the Prime Minister has himself acknowledged recently, doing business continues to be tough in India.

If we go solely by policy announcements, the government of India has showed the right intentions. It has set high aspirations of growing the share of manufacturing from 16% to 25% of GDP and has come out with the National Manufacturing Policy (NMP) with many game-changing initiatives proposed. But like most policy initiatives in the country, there is a big gap between policy announcements and implementation. If we want to take advantage of this window of opportunity in any significant way, we need large-scale manufacturing zones to be set up rapidly. At the very basic level, this requires land, power, skilled labour and speedy permissions. All these four areas face serious problems, which are well known, and proposed solutions have been under discussion for a long time and are at different stages of implementation.

I have two simple points to make. First, as a nation, manufacturing job creation should be one of our top priorities. Second, we need to create a sense of urgency and ownership to take advantage of this window of opportunity that has been presented?it will not last indefinitely.

On the former, I must narrate a recent conversation with an industrialist to show how far we are in our official thinking and approach from where we need to be. The industrialist was sharing his experiences in setting up new plants in China and Thailand. He described how he felt like a visiting dignitary when the Mayor and all his key officers came to the airport to receive him in China and demonstrated what a single-window clearance can look like. They came to him rather than he running after them, and to get him to invest, offered to hire and house the workers for him. Similarly, in Thailand, his application for a new plant was approved with all the permissions in one month. He was sanctioned power and water connections and showed four plots of land to select from. The only commitment they wanted in both countries from him was the number of jobs he would create. He contrasted this experience with India where he said that the approach is ?you are guilty until proven innocent? and to make you run from pillar to post for even the most routine of permissions. No one asks even once how many jobs will the investment create!

Changing entrenched mindsets is never easy but if we want to create the 200-250 million jobs that the country needs in the next 15 years, we have no other option. Why can?t creation of 200 million jobs become the single-point agenda for an inter-ministry team that covers the four areas of land, power, skills and regulatory regime? It is easier to monitor and hopefully will focus their minds and energy. To the question of urgency and ownership, a possible solution is to implement the most important policy in the NMP, namely set up National Investment and Manufacturing Zones (NIMZ) to promote new large-scale manufacturing. Can we not create a statuary body with clearly defined mandate and decision rights, which will be the implementation arm of the government and will be responsible for creating, say, 20 NIMZs over next 10-15 years? The challenge, as I understand, is to take the different stakeholders along as they cut across central and state governments and different ministries and departments.

As they say in sports, ?the game is ours to lose?. Compared to many other large developing countries, India starts on a strong footing in this critical race to become the next manufacturing capital for the world. How we play this game in next 10 to 15 years will determine whether we win or continue or remain a country of unrealised potential.

The author is managing director, the Boston Consulting Group, India. These are his personal views