The real prize for manufacturing

What is manufacturing?s real prize? It is the expanded home market for consumer goods, both durable and non-durable, and the physical capital and intermediates that go to make these. The upside of being a poor country is that there is plenty of good news yet to come, before the ennui of affluence and ageing populations dilute the imperative of growth. The domestic market for manufactured consumer goods, from cars to mobile phones to branded clothing, is supposed to rise and does so at a growing pace, when the starting base of incomes is as low as it is (and was) in much of Asia.

We have seen this in South Korea, Taiwan and Singapore years before, though promptly dismissed by many as exceptions from which sub-continental economies like India had little to learn. Over recent decades, China has begun to happen and the repercussions on world commodity markets, trade balances and business focus has been transformational. Doubtless, the sceptics of globalisation and custodians of the moribund characterisation of capitalism will find new exceptions as to why India must fail. The high priests of anti-capitalism have too much stake in the mantra of economic Armageddon.

But it is not irrelevant to ask why India?s first tryst with industrialisation (1955 to 1990) was less than stellar ? roughly for the same reason as for China?s first (1955-1978) experience. Namely, the discouragement of consumer goods, trade insularity and marshalling of all available resources to finance heavy industry through the state sector. This path creates its own moribund version of underdevelopment. Deng Xiaoping recognised this early on and forced the ?Middle Kingdom? to change direction. We continued to argue and most amazingly, still do.

Think about this: a list of the top 20 business houses drawn up in the 1960s would hardly have been different from a list constructed in 1990 with Reliance being the sole new entrant. However, a list drawn up in 2004 would at most have three or four names in common with vintage 1990. If that is not transformational, then what is? Schumpeter said it, but even a cursory glance at modern history informs us that if the industrial ruling class exhibits no symptoms of upward mobility, it is a moribund one. Namely, one incapable of change and, hence, incapable of anything progressive.

So the plutocracy of the unchanging capitalism of India?s regime of licence and control, of economic and political insularity, of hot air and creaky, obsolete engines, held on to their position unchallenged. It was but natural that Indian enterprises should fear foreign competition. It was inspired by sound judgement of the reality. In the one-and-a-half decades following the advent of reforms, everything has changed. The top dogs who survived and the others who have scrambled to the top do not have to depend for their survival on constant appeals to the national interest and unholy cohabitation with woolly socialist slogans.

Reverting to the issue of manufacturing opportunities ? once the economy is set on track, the pick-up in demand for manufactures is enormous. The experience of China is worth learning from. Take any industrial product: energy ? petroleum, coal, electricity; basic materials ? steel and cement; or intermediates like manmade fibres, or consumer goods like refrigerators, washing machines and cars. Output growth has maintained an astonishing pace through the ?80s and ?90s, between 15% and 30%. Only for cars did real expansion begin in the second half of the ?90s. Even in 2004, manufacturing output grew by nearly 18%. The output levels have been enormous: steel, over 200 million tonne, cement, over 700 million tonne, i.e., over five times the level that we are at in India. Increasingly, China has become the largest market for industrial commodities and raw materials, both mineral and food.

If we see ourselves in a situation comparable to where China was in the late ?80s, clearly there are several decades of very rapid growth ahead. If we pose the question differently, we could say that quadrupling per capita real income over the next 25 years is a reasonable and desirable objective. That is, an average annual growth of 5.7% in per capita incomes and a little over 7.2% average annual growth in GDP. Given that the weight of manufactured goods in the consumption basket increases as the level of income rises, manufacturing output needs to expand by 10% if not higher. That is, over the same 25-year time horizon, during which real per capita incomes would have quadrupled, the volume of manufacturing output would have increased 10-fold, repeat 10-fold.

Access to external markets helps in building the capacity to service a home market that might be 10 times or more than the size of the present one. First, because export markets are unlimited (with respect to domestic manufacturing capacity), it is possible for output to race ahead of home demand in the initial period, permitting larger operating scales. Second, success in the export market is conclusive evidence of the ability of the domestic producer to survive the fire of international competition. Hence, in the expanded home market under conditions of liberal trade rules, the domestic producer is advantageously placed. We might note that this year and indeed in the past couple of years, the rate of growth of manufacturing exports (about 15% plus) has been faster than overall output. Implying, thereby, that the domestic market was growing slower than output. So far, so good. But we need to facilitate the expansion of manufacturing, as the order of scaling that it is likely to undergo in coming years will be truly massive. Then there is the question of creating quality blue collar jobs, which can only directly and indirectly come out of manufacturing.

The writer is economic advisor to Icra