What does India need to do to ace manufacturing?

India has much work to do, to realize our full potential in manufacturing. According to HowMuch.net, China’s manufacturing output in 2018 was $4 trillion, followed by the US $2.3 trillion, Japan $1 trillion, Germany $806 billion, South Korea $459 billion and India $412 billion. Our share of global manufacturing is 3%.

The concentration of global manufacturing in China over the past four decades was the result of high labour productivity and reliability of supply (political stability, pro-business government, high quality infrastructure, and stable corporate-labour relations). But, this reliability was undermined during the first months of the pandemic. Therefore, multinational corporations (MNCs) are thinking more local: (i) localize a few manufacturing operations in their home countries, under pressure from their governments, and (ii) reduce their reliance on China for certain categories of products. How can India benefit from this shift?

India’s large and growing internal market is the strongest driver for domestic manufacturing. It also has a large pool of skilled, semi-skilled and unskilled workers, making it an attractive location for both technologically advanced and low-cost products. Labour costs in India are significantly lower than those in most middle-income countries. According to Deloitte’s 2016 Global Manufacturing Competitiveness Index, China and India had hourly labour costs of $3.28 and $1.72 respectively. Yet, our manufacturing footprint is miniscule relative to the potential. Clearly, the blame for this sorry state of affairs lies with us.

It is time we claim our place in the sun and for that we need to bear in mind the following:

1. Productivity: Low productivity nullifies our labour cost advantage. In manufacturing competitiveness, in the Deloitte study, China ranked first whereas India ranked 11th. Our low productivity is less due to lower skilled labour than it is to weaker infrastructure — roads, ports, airports, railways, power and telecoms. Telesales people lose productivity if the mobile network is congested, because they can make fewer calls per day. Internet users are able to accomplish less per day due to low bandwidth. Business development executives are less productive in Bengaluru or Mumbai, where due to traffic congestion they can visit on average two customers a day, relative to Singapore or Shanghai, where they can visit three to four. A factory in India, in spite of having skilled labour and state-of-the-art technology, loses productivity due to power cuts. As we can see, lower productivity is often not caused by lack of individual motivation or skills but due to ecosystem deficiencies.

It would be wrong not to acknowledge that India has made improvements in logistics efficiency in recent years. According to Mahindra Logistics, trucks in India are travelling 10-15% more kilometers per day post-Goods and Services Tax (GST) than pre-GST, thanks to the e-way bill. The availability of digital platforms such as Blackbuck and Rivigo, the Ubers of trucks, has also improved truck utilization. There has been more improvement in our inter-city and inter-state road infrastructure than in our intra-city infrastructure, which needs higher investment and faster completion of projects.

Our average turnaround time in ports have improved from 5.29 days in 2011 to 2.73 days in 2019, but we are still far behind world leaders such as Shanghai, where the turnaround time is less than a day. In terms of the Liner Shipping Connectivity Index (LSCI) published by UNCTAD, which measures how well a country is connected to others by sea, China ranks first in the world, whereas India comes in 24th.

For all of this we need money but here, too, China scores better, in terms of its savings rate which has ranged between 45-50% of GDP since 2005. On the other hand, over the same period, India’s has consistently been 15 percentage points lower. Therefore, our capacity to invest aggressively and to upgrade our infrastructure from our internal savings is limited. We need to think creatively about how to close this huge funding gap.

2. Factory dormitories: During the lockdowns, the whole country saw the terrible living and working conditions of migrant labourers. The 2011 Census estimates the number of these labourers at 139 million. When they come to the big cities in search of jobs, there is no system that helps them integrate happily. Many end up in slums, where the quality of accommodation and hygiene conditions is poor. They also need to commute long distances to work every day. One innovation that China has tried to absorb large numbers of migrant workers is the factory dormitory, through which they are given accommodation and food in the same campus where the factory is located. This model is not unknown in India, but it has not been deployed on a large scale in the manufacturing sector. The academic research in China has tended to emphasise the challenges, such as mental health issues of the workers due to lack of social integration, poor living situations and exploitative work conditions, rather than the advantages.

To put things in context, there has been internal migration of more than 200 million workers over the past four decades from the less developed provinces in the central and western parts of China to the coastal regions. These migrant labourers were by and large young when they first moved, typically in their late teens or early twenties, and a large percentage was female. Many young migrant couples left their children in the care of their parents and saw them only once a year, during the Chinese New Year holidays. This separation has taken an emotional toll on families, and India may need to keep this and other factors in mind when formulating its policies. Factory dormitories offer two distinct advantages: safety (especially for young female workers) and productivity (from the time saved in commuting to and from work). They also make it easier to cater to surges in demand through overtime work, as the workers are practically on call. Foxconn employed 500,000 workers at one point in Shenzhen, in facilities covering 1.16 square miles that resemble a mini-city with its own bank branches, restaurants, convenience stores, gyms and entertainment centers. Well planned factory dormitories with clear regulations can help Indian factories attract and retain labour from rural areas, can make the migrants less vulnerable and can improve worker productivity. But here, a factory owner needs more than intent.

One MSME founder I spoke to asked me, “When we are not getting land for setting up production facilities, where is the question of land for dormitories?” Another MSME paid Rs.35 million over two years ago to one of the state industrial development authorities for a plot of land and has still not been given possession because of a dispute over compensation between the seller and the industrial development authority. In spite of sincere efforts by successive central governments, the land acquisition question is far from resolved.

3. Aligning politics and economics: In China, politics and economics are in near-perfect alignment whereas, in India, politics usually trumps economics. This leads us to make sub-optimal economic decisions. For example, let’s look at the decision to disallow the sale of “non-essential” products on e-commerce platforms when the lockdown began. On one hand, people were advised to work from home (WFH) and students were required to study from home (SFH). On the other, they were told that WFH and SFH tools such as computers, printers, printer cartridges, phones, chargers, webcams, headphones, books and crayons were “non-essential” items. Thankfully, this decision has been reversed in recent weeks in most parts of the country, but we lost a valuable opportunity to keep economic activity ticking during nearly two months of total lockdown. Such muddles have to go if India wants to play a bigger role in global manufacturing, which requires bringing in cutting-edge technologies through foreign direct investment.

Even in the midst of this economic slowdown, there are millions of Indians who have kept their jobs but have spent very little for the past four months on travel, going out to eat or going to the movies. Therefore, they can afford to spend money to meet their needs and even to indulge themselves. Hundreds of thousands of IT sector workers are working from home and they may want to buy more comfortable desks and chairs to create a home office, and treadmills and stationary cycles to exercise at home. If such needs could be satisfied safely, the economy can revive and people who were retrenched can find jobs again. Prohibiting “non-essentials” is a lose-lose policy for everyone because (i) customers’ needs are not met at a time when it is imperative to boost demand as much as possible while minimizing the risk of infections; (ii) suppliers are deprived of business when they are trying to dispose of inventories and generate cash to start producing again; (iii) businesses up and down the supply chain — such as transportation and warehousing businesses — are deprived of much needed revenues; (iv) the central and state governments are deprived of CGST, SGST and IGST; and (v) offline merchants do not have the incentive to adopt the online channel when the line between online and offline is becoming increasingly blurred.

4. Leveling the playing field: Finally, we need to have a level playing field for the public and the private sectors, and between the domestic and international companies. Let us examine how the Vande Bharat programme was implemented. While the decision to bring back Indians who were stranded abroad deserves appreciation, its implementation raises a number of questions. Given that air travel is one of the industries most negatively affected by the COVID-19 pandemic, why were private airlines not treated on par with Air India right from phase-I of the programme? They need as much help as Air India to tide over this crisis. Given that Air India had limited capacity for outbound and inbound flights, why were private Indian and foreign airlines not co-opted to bridge the gap between supply and demand? Why were most international flights leaving from and returning to Delhi when there was demand for travel across the country? There were a number of messages on social media from NRIs stuck in India during the lockdown and desperate to get back to their host countries to resume their employment. They had not been able to get any tickets on Air India’s outbound flights. There were reports in the media of NRIs who were denied permission to board in spite of having bought tickets on flights operated by foreign airlines to evacuate their own citizens. Given the important contribution NRIs make to India’s economic health (most notably through remittances), should it not have been as much of a priority for the Indian government to ensure that the NRIs preserved their jobs as it was to bring stranded Indians back?

The economy is interconnected and the manufacturing sector does not exist in isolation. It needs efficient service sectors such as airlines, railways, road transportation, communications, hotels, education and training, financial services and retail, including online retail, to be competitive. We need to urgently nurse these sectors back to health.

To summarize, India has the ingredients — large domestic market and abundant supply of skilled, semi-skilled and unskilled workers at low cost — to become a major manufacturing hub. Whether or not we achieve our objective is completely dependent on us. It won’t be easy. We have to build the infrastructure, improve laws such as for land acquisition and labour, and continuously better productivity by adopting innovations such as the factory dormitory model. We also need to make sure that our decisions are guided by rational economic criteria and by fairness towards private sector companies, both domestic and international.

THE AUTHOR IS THE CHENGWEI VENTURES PROFESSOR OF ENTREPRENEURSHIP AT THE CHINA EUROPE INTERNATIONAL BUSINESS SCHOOL.