Unleashing India’s Industrial Potential: Building a Globally-Competitive Manufacturing Base
While the world is moving to the information age, industrialisation remains an important driver of employment, prosperity and growth. Industrialisation has historically been one of the biggest drivers of shifts in global geopolitical power starting with the rise of the British Empire after the industrial revolution, followed by the rise of the US in the first half of the twentieth century and the rise of Asia (first Japan and the Asian Tigers and then, much more dramatically, China) in the latter half. Power and prosperity has flowed to the countries and regions which have successfully unleashed industrial transformations. India however missed the Asian industrial revolution, with its recent growth driven primarily by its services sector. Services for a country the size of India has not been sufficient to create growth to drive mass prosperity; India has grown at half of China’s pace since 1980 when both India and China had a per capita GDP of c.US$300. China’s has grown at a CAGR of 10% over the last three decades reaching c.US$7,000 while India’s, growing at half that pace, is currently at c.$1,500. In spite of similar population sizes and low-cost profiles, China’s industrial sector at US$4 trillion (and still growing), now dwarfs India’s which is estimated at c.US$300 billion. With China reaching middle-income levels and its leadership implementing reforms to re-balance the economy towards the services sector and consumption rather than manufacturing and investment; its competitive advantage has eroded and is likely to continue to do so (See our Sign leader from April 2014 on China’s Changing Competitiveness to 2025).
India, with its far more favourable demographics, has a huge untapped labour pool and has therefore retained the potential to create a cost advantage. Just as the US took over dominance in manufacturing from the British Empire at the turn of the twentieth century, India now has an opportunity to truly harness its demographic dividend by creating a large number of manufacturing jobs and displace China as the world’s factory. With a new government led by Mr. Modi with a sweeping parliamentary majority, there is now an opportunity to make the necessary structural changes to unleash an industrial revolution (See our Sign leader from Mar-2014 on 12% Growth Agenda: A Blueprint for India’s New Government). Whether or not India capitalises on this opportunity will not only determine the country’s economic course over the next few decades, it will also determine India’s place in the emerging geopolitical landscape as the role of Asia in the world continues to become clearer and the US strategy towards China continues to develop.
Creating an industrial revolution of the scale that would be material in term of geo-economics and geo-politics requires the new Indian government to develop a strategy that turns India’s mass population into a strength. This will of course not be easy and requires India to absorb the policy lessons from modern imperial history, from the other Asian countries and leverage its own strengths in knowledge-based industries to create a manufacturing base that takes people out of poverty and on a scale and in a manner that changes the game in the global manufacturing industry. China, the Asian Tigers, and Japan provide several critical lessons which India needs to absorb:
(i) Importance of Scale. China’s experience demonstrates that economies of scale play a crucial role in rapidly expanding the industrial sector. In industries such as white goods, chemicals and auto ancillaries, China redefined the idea of “minimum efficient scale” by building a scale that was well in excess of sector norms. For example, in the early 1990s, the Chinese firm Haier set up a 100 acre industrial park – China’s first, and the largest in the world at the time.
(ii) Importance of Industrial Eco-systems. Scaled manufacturing not only creates industrial efficiencies, but also enables a supplier ecosystem to emerge which in turn makes manufacturing more competitive. In the electronics industry, China and Japan have both focused their efforts on creating local supply chains resulting in companies like Apple making Guangzhou their hub for making iPods and iPhones.
(iii) Importance of Scaling the Domestic Supply of Human Capital. Major investments in education, R&D and skills development have been an important driver of industrial growth. All the Asian Tigers achieved universal primary education by 1965 and South Korea achieved c.90% secondary enrolment by 1987. This foundation enables the transition from basic to more advanced skills which is essential to the development of advanced industries.
(iv) Importance of Mobilising Investment. China and Japan have pioneered the investment and export led industrial growth models by effectively mobilising domestic savings towards fixed asset investment. China went a stage further by attracting foreign domestic investment by making it easy for foreign corporations to set up its global manufacturing facilities, attracting US$1.5 trillion of cumulative FDI between 1990 and 2013.
(v) Importance of Attracting Foreign Intellectual Property. In the 1990s, China not only had the vision to allow foreign corporations to employ its people by establishing huge manufacturing facilities, it also had the foresight to see that this would bring with it intellectual property and that this would transfer into the hands of domestic companies. Indeed, in some cases, the need to work with a joint venture partner made this a necessary price of entry. For example, China’s current global leadership in high-speed trains (and its decision to launch a US$32 billion Shanghai-Beijing rail corridor) can be attributed to intellectual property state-owned firms acquired in the early 1990s through product and technology licensing with leading international manufacturers.
(vi) Importance of Picking the Right Industries. All the Asian manufacturing miracles have consciously selected and invested in certain core industrial segments in order to quickly build scale and competitive advantage. Japan, Taiwan and South Korea’s focus on high-technology manufacturing and China’s policy focus on specific export product markets has allowed strong competitive advantages in these sectors. South Korea’s current strength in nano- and bio-technologies can be attributed to government investments in 23 projects in bio-science, nanotechnology, space technology and other related areas between 1999 and 2009.
(vii) Importance of Making it Easy to Do Business and Trade. Several of the East Asian countries recognised that a conducive regulatory and business environment combined with ease of importing and exporting tangibly lowers costs for industry thereby providing better margins and making it more attractive for investment. Malaysia and South Korea are the two most prominent examples – with both countries currently ranking in the top 10 in the annual global ease of doing business rankings (ranked 6 and 7, respectively). If manufacturing is to take its place among the top transformational initiatives on the Modi administration’s agenda, the government will need to rapidly internalise these lessons in order to launch a process which quickly moves on its own momentum towards delivering success. India will need to absorb the lessons not only of its Asian peers, but also the best practices from the highly developed countries such as the US and Germany, in order to create a 21st century industrial revolution. One approach would be to develop local industries based on addressing a long list of challenges. This list of challenges for India’s manufacturing sector is long-standing and well-documented and has inhibited its overall economic growth over several decades (see inset). The challenge is not just to address each of these but to initiate a programme which leverages the know-how, capital and talent of the world into India. In our paper, “India Wide Open” (available here), we outlined the philosophy, strategy and key ingredients of such a plan.
“The Right Man for the Job” with a Historic Opportunity
Mr. Modi is being hailed as the “right man for the job” in many quarters given the state of India’s economy. Mr. Modi has shown the key ingredients for this kind of industrial transformation in his home state of Gujarat which he led for the last 12 years before his landmark election victory in India’s recently-concluded general elections. With just 5% of India’s population, Gujarat contributes 17% of the country’s industrial output and accounts for 25% of its exports. Industry now has a c.30% share in Gujarat’s economy vs. c.15% at the national level. This remarkable industrial growth has allowed Gujarat to become one of the most prosperous states in India with a per capita income almost 50% higher than the national average. While the entrepreneurial heritage of the Gujarati community (which includes merchants and traders who have migrated across India and much of the world) has contributed significantly to Gujarat’s success, Mr. Modi’s government has catalysed this through a state-level policy framework focused around (i) streamlining administration, (ii) creating rapid infrastructure development (roads, ports, power), and (iii) mobilising significant domestic and foreign capital. These factors together have helped Gujarat achieve an average annual industrial growth rate of 10% over the last decade vs. 7% for India as a whole. Mr. Modi’s government will now need to find a way to replicate this success at a national level for the balance 95% of India’s population. Even with the stable parliamentary majority which his party secured in the election, this will be far more challenging. If the answer has to come by dictate or by changing old laws, it is unlikely to be successful quickly enough. No doubt some laws will need to be changed and that list is being drawn up and the priorities are being set. However, for speed and effectiveness, it makes far more sense to work with states that are cooperative, to create “islands” (or special zones) where new rules can be created and to create symbolic events that create the demand for change. So, in parallel to the slower process of implementing legal changes at the national level, a good starting point for the government would be to focus on implementing its strategy in the key states of Uttar Pradesh, Bihar, Madhya Pradesh, and Rajasthan which account for over one-third of India’s total population and where the ‘demographic dividend’ will be largely concentrated over the next decade. Most of the workforce in these states is currently dependent on subsistence agriculture and Bihar and Uttar Pradesh rank amongst India’s poorest with per capita incomes which are 60% and 45% below the national average, respectively. These states voted overwhelmingly for change in the recent elections, with Mr. Modi’s party (the BJP) and its allies securing c.85% of the cumulative parliamentary seats in these states. The BJP already controls the state legislatures in two of these states (Madhya Pradesh and Rajasthan), and based on the recent performance, may well come to power in upcoming state assembly elections in Bihar and Uttar Pradesh. If Mr. Modi can effectively work with these states to ensure that new policies are adopted at the state level, the government could gain the wins it needs to galvanise the national reform process. Indeed, if only the four states with 35% of the population benefited, the strategy would have been successful. This success would of course be heavily advertised and would kick-start a healthy competition amongst states to deliver to their own populations.
The Prize: India Creates the 21st Century’s Industrial Model
For highly populous nations, even in the information age of the 21st century, possessing a highly productive industrial base is the cornerstone of prosperity. World attention has been on China’s manufacturing base and analysts have been marking the day when China overtakes Germany, then Japan and then the US. China has proven that such an asset not only creates prosperity, it creates geopolitical clout. In countering this power, the Bush Administration began to woe India by legitimising its nuclear arms programme. This became even more important once the Obama Administration declared its “Asia Pivot”. However, India has struggled to live up to the promise of an economically and politically powerful democratic success. It is highly clear that India is the only country of size and scale to compare with China in the plans of nations and global corporations and this has become important to the US, Japan and the many Asia-Pacific nations daunted by China’s growing power. Arguably, this is not the reason for India to create a mass industrial base. The better reason is to pull its people out of poverty and to create opportunities that enable its citizens to unlock their potential. This personal economic logic has been behind the outright victory the electorate handed to the Modi government. The examination of where India is today, what it means to have an industrial base in the 21st century and what it takes to create is the subject of the remainder of this paper.
The Baseline: India Lags, India has Potential
India has lagged expectations: the glass has been half empty for a long time. India has great potential: the glass has been half full for a long time. How full or empty the glass is, is not easy to calculate. In the absence of comprehensive and comparable data on other parameters, any analysis of manufacturing competitiveness tends to focus on relative wage and labour cost differentials. However, simply looking at India’s low absolute wage levels is a poor way to measure the country’s manufacturing competitiveness because it fails to factor in the significantly lower levels of labour productivity and higher other costs of doing business (logistics, freight and other costs). A simple comparison with China (see table below) demonstrates that despite higher absolute labour costs, China’s effective manufacturing productivity (industrial output per unit of wages) is still 30% higher than India’s. Similarly, looking at total logistics spending also does not paint an accurate picture. In spite of China’s logistics spending being more than 6x India’s levels, relative to the country’s industrial output, it is almost twice as efficient as India in managing its logistics costs. Other metrics such as the time and cost of exports and imports are also presumably lower in China and other Asian low-cost manufacturing destinations (such as Thailand, Vietnam, Sri Lanka, Bangladesh) which consistently rank much higher than India in the metrics analysed in the annual ease-of-doing-business rankings.
The Powerful Impact of Manufacturing on India: Creating a Multi-Decade 10% GDP Growth Machine
If India is to deliver rapid industrial growth which is sustained over the next few decades, clearly China provides the best benchmark given its scale and success in fostering its own industrial revolution. In spite of India’s seemingly weak baseline position against China’s manufacturing sector, it is nevertheless well-poised to improve its competitiveness vis-à-vis China and other Asian manufacturing destinations due to a combination of factors. After three and a half decades of rapid industrial growth, China’s economy appears to have reached close to full employment and recent years have seen sharp increases in average wages in excess of output growth. Furthermore, its exchange rate has also appreciated considerably (28% over last two decades vs. 93% depreciation in the rupee over the same period) and freight costs are unlikely to see the kind of structural decline which spurred China’s export miracle. As a result, China’s manufacturing competitiveness has steadily declined since the early 1990s and will likely continue to erode over the next few decades (See our analysis in the April 2014 Sign of the Times where we examined potential scenarios for China’s competitiveness over the next decade). India’s manufacturing competitiveness relative to China and other countries, on the other hand, has gradually improved since economic liberalisation due to (i) rising productivity growth across sectors, (ii) low labour costs due to a large labour pool which is still very far from full employment, and (iii) a declining currency. As a result, India’s relative competitiveness is likely to continue to improve vis-à-vis China and other Asian countries which have already developed their industrial bases and will likely surpass China at some point in the next few decades. The key question for India however, is not whether it will become a more competitive manufacturing destination than China, but rather how long it will take to reach that point. Given some of the key factors are already aligned in India’s favour, the speed at which it can close the competitiveness gap will depend entirely on the decisions of its government and policymakers and whether it can successfully (and quickly) implement reforms which will drive manufacturing productivity, manage wage inflation and reduce other manufacturing costs. Over time, global factors (such as exchange rates and other countries’ policies) and intrinsic factors (such as wage differentials) will become less favourable to India, which implies that it has a limited window of opportunity years to accelerate reforms which can harness its advantages to create an industrial revolution and become a global manufacturing superpower. In order to understand the potential impact of accelerating industrial reforms, we have modelled two scenarios for India’s manufacturing sector with the following key assumptions:
- Baseline Scenario with Gradual Reforms. Under this scenario, Mr. Modi’s government is assumed to continue down the path of gradual reforms which will help India achieve the current consensus GDP growth rate of 6-7% for the next decade. The scenario also assumes that wage growth will exceed productivity growth due to inflexible labour markets because of an inability to enact significant labour law reforms, while other manufacturing costs will reduce only gradually due to slow infrastructure development. As a result, India’s relative competitiveness would stay largely flat vs. current levels and it would take only moderate (c.2%) share of global manufacturing.
- Accelerated Reforms Scenario. Under this scenario, Mr. Modi’s government would launch significant industrial reforms to make Indian manufacturing more competitive including labour law reforms (which would results in a slower pass-through of productivity to wages), rapid infrastructure development (which would lower other manufacturing costs) as well addressing other bottlenecks. As a result of these changes, India’s competitiveness would improve significantly and exceed China’s competitiveness by 2025 and it would take significant (c.7%) additional share of global manufacturing.
The summary of the key results of the scenario analysis are presented below:
Therefore, by accelerating industrial reforms and triggering a manufacturing revolution, India could increase its overall GDP growth rate to up to 10% on the strength of industrial reforms in the manufacturing sector alone (factoring in the likely incremental impact on services and agriculture that such an aggressive reform agenda would likely have, overall growth could of course increase even higher) . More tangibly, industrial reforms on this scale could provide over 200 million new manufacturing jobs by 2025 (compared to a baseline estimate of c.80 million) with average wages of $4,200. These jobs would benefit India’s most impoverished people who are currently dependent on subsistence agriculture indicating that this is the most impactful way in which India can reduce or even eradicate extreme poverty.
Strategy and Vision: What Would India’s 21st Century Industrial Revolution Look Like?
For Mr. Modi, implementing such a far-reaching reform agenda will be about more than just legislative action. It will be about forming a vision for India’s industrial sector and executing it through both the policy framework and other actions (such as investment promotion). The industrial experiences of Great Britain in imperial times, the US, Japan, the Asian Tigers and China have all been different and each has had a unique model which leveraged the best of what each country could offer and also factored in the economic, social, cultural and political contexts of the time. For the scale of transformation that is required, India also needs a uniquely ‘Indian Model’ of industrial development which leverages off its core strengths. A comprehensive vision for industrial development would sit above the following strategies (which are complementary rather than mutually exclusive):
I. Making India Wide Open to the World. Indians alone cannot build the industry, IP and infrastructure required to take hundreds of millions out of poverty and make this government a resounding and historic success. That requires India to co-opt the world. The appropriate strategy would be for India to ‘open’ the potential of its people, its resources and its entrepreneurs to the world and leverage the rest of the world for its own economic transformation (See out Sign leader from Feb-2012 India Wide Open: Transforming India Now for 2040). India would need to recognise that such a far-reaching industrial revolution cannot be accomplished by domestic players alone and so India would set out to become a manufacturing base for the world by attracting industrial investments from key countries like Japan (see our Sign leader from May-2014 India and Japan: The Strategic Agenda), the US, Germany (and other EU countries), and also China.
II. Injecting IT into Industry to Create the Next Generation Intelligent Manufacturing Base. India would leverage its strong services sector and in particular its world-class IT industry to infuse IT into manufacturing, using analytics to drive supply chain efficiencies and productivity growth through the full use of IT deployed at scale. India’s large pool of trained manpower including its engineers and researchers would help it become a global innovation hub and laboratory. India has already proved that it can do this and become globally-competitive in sectors such as automobiles and pharmaceuticals. The industrial revolution would see this advantage extended to several other sectors.
III. Scaling India’s Artisanal Manufacturing Class. In order to harness the true potential of its large number of SMEs which employ close to 40% of the country’s workforce and dominate several key product markets such as textiles, handicrafts and metal products, India would need to organise and scale these businesses through joint ventures and additional investment. Prominent examples of such mid-sized often family owned and run class of businesses exist in Germany where they are highly respected (called the “Mittelstand”) and also in Italy and Japan which have each spurred innovation and have created globally-competitive scaled players with strong brands in several sectors and extended their reach across the domestic markets and the rest of the world through exports.
IV. Creating Multiple Industrial Bases Through State Level Specialisation. India’s heterogeneous states offer a microcosm of the world with the richest state having a per capita GDP 7x higher than the poorest state. India could leverage this sheer regional diversity to establish competitive positions in a wide range of industries and segments. For example, it could focus on utilising its poorer states (see map below) to compete in low-skilled manufacturing (with countries like Bangladesh, Vietnam, Thailand), its relatively middle-income and richer states to compete with industries from China’s industrial belt, and its richer states to attract R&D and high-skilled manufacturing from advanced countries (like Japan, US, and Germany).
V. Building India’s Chaotic Cities into Smart Manufacturing Clusters. India’s metros and urban centres are dominated by slums which are hotbeds of economic activity however operating far below their potential (see our Sign leader from October-2013 Transforming India’s Slums: A Critical Step in Creating the New India). Various cities in China, Japan, Dubai and the US have experimented with creating smart cities and industrial clusters geared around innovation – with varying measures of success. Developing an industrial model for its cities which leverages the economic potential of slums would ensure India’s cities become highly productive and also plan for urbanisation so that they are not subsequently plagued by the type of pollution that is now assaulting the lives of Beijing and Shanghai’s citizens. On this front there are important lesson from China’s industrial experience (See our Sign leader from April-2013 China’s Potential Green Future).
VI. Building Islands of New Rules and Regulations. Rather than wait for a nationwide consensus on the aggressive reform program which will be difficult given India’s complex political climate, India could also opportunistically create islands of reform with states and special economic zones with a clear set of new rules in order to immediately start attracting additional industrial investments. China has demonstrated this strategy to great effect with its trade zones along the coastal provinces whose success has effectively provided the benchmarks for the other provinces and regions of the country to reform. The Shanghai Free Trade Zone is a whole new level of strategy, through which, if China is successful, it will create the seeds of a new-rules China: more transparent, more legally bound and far easier to do business with.
VII. Transforming India into a Power and Resources Industrial Giant. India is well-endowed with natural resources which it has nowhere close to fully harnessed. Vast untapped coal reserves, discoveries such as the offshore KG basin (which could double the size of India’s natural gas reserves) and the hydroelectric power potential in the country’s northeast worth an estimated US$35 billion annually point to an opportunity to transform India into a resource hub like Australia or Texas. A similar opportunity also exists in food production where India’s yields per acre are a fraction of China’s and the rest of the world’s. India would need to mobilise significant investment to explore and harness these resources both to power India’s own growth and also to become a global resources hub.
Pre-Requisites for Successfully Executing the Vision and Strategies
This Indian election, perhaps more than any other in India’s history, reveals a population that does not accept democracy as an excuse for slow and ineffective change. If the Modi government is to continue to be a force that is trusted by the population to deliver, it will need to implement a bold vision and the type of strategies that go with such a bold vision and it will need to do so very quickly. The lengthy legal processes of India’s democracy cannot be held up as an excuse for failing to deliver. China’s non-democratic government election process has delivered far better than India’s democratic one. The bulk of evidence from Freedom House and other analysts, make clear that this is a failure of leadership in India rather than a failure of democracy. The pre-requisites for success include the following:
- Maintaining a Stable Powerful Government for Next 10-15 years. President Xi can expect to have 10 years to deliver his agenda. However, unlike China’s government, Modi’s government can only legitimately be in power if the electorate says so. So if it fails to secure three election victories, it seems unlikely to have the time a Chinese leader has to deliver. So of course, it will need to convince the electorate and this requires it to deliver. The first betrayal of the electorate would be to mismanage its agenda and deliver the country back to shaky coalition politics and policy gridlock. It will be critical to maintain a stable governing majority while de-politicising the idea of industrial growth. Brazil demonstrated from year 2002 to 2011 how a government with a strong mandate managed to build a political consensus for reforms and growth.
- Tackling Corruption and Inefficient Governance. Rapid reforms and development will require transparency in government processes. Improving administrative effectiveness, while reducing the discretionary powers of government officials will be needed in order to ensure that industrial development happens at the required pace. India currently stands at 94th in the global league table for corruption and 134th for ease of doing business and will be watched closely for progress.
- Launching a Massive Build-out of Transport Infrastructure. The competitiveness of manufacturing in India will depend not only on flexible labour markets and low labour costs, but also on the costs imposed through the country’s lack of adequate infrastructure. Building a robust trade and transport network (highways, ports, etc.) will be critical to reducing logistics costs and thereby improving competitiveness. Previous governments’ ambitious unimplemented plans stand as a starting point but implementing these will require huge amounts of foreign capital and this will require a new “trust contract” will global capital providers.
- Opening India to Large Amount of Foreign and Domestic Capital. Industrial growth is far more capital-intensive than service sector growth, and will therefore require large amounts of capital to be mobilised – both by opening India to large foreign investment and unlocking domestic capital currently tied up in unproductive physical assets (like gold). India has benefited from being averse to debt but there are not decent comparables of the levels of financing required for India’s infrastructure and industrial plans that do not deploy large amounts of debt. If the Modi government indebted India, its place in history would be marked for all the wrong reasons. The new government will need to consider new structures involving debt and equity, combinations of public and private capital and sovereign and pension funds.
- Creating a Level Playing Field for Domestic Manufacturers. It will be impossible to build a consensus around the influx of foreign capital without creating a level playing field for domestic manufacturers. Rationalising poorly-targeted subsidies and trade barriers while ensuring the tax and regulatory framework does not disadvantage domestic manufacturers will be required. However, the focus for the short term will be the bank interest of a domestic player versus a foreign one. Given foreign interest rates are still close to zero compared to current Indian interest rates of 8-10%, this will require all manner of risk capital through private equity and sovereign capital. This may still not be enough and India may also need to consider a state owned fund to kick-start its agenda.
- Leveraging the Low Currency While it Lasts. The Indian rupee has depreciated 32% against the US dollar in the last decade. This, combined with India’s already low-cost base, has given India a window where it is relatively more competitive against other low-cost manufacturing locations. It will be critical to harness this advantage before the currency moves in the other direction.
- Creating Success Stories and “Champions” in States. Creating national manufacturing champions (like Gujarat) out of the states and zones where reforms can be implemented will be critical in creating case studies of success and a competition amongst states. China managed to do this successfully by rewarding provinces which delivered industrial growth while extending their success to other areas.
- Measuring and Communicating the Results. In India’s chaotic democracy, to maintain and build its political capital, the government will need to build public support its vision for reforms and industrial growth. To sustain this consensus, constant measurement and communication of the results will be needed through strong leadership. The Modi government managed this highly effectively in the pre-election period. The challenge of continuing to hold the attention and goodwill of the people in the years to come through what will be a time of huge change while allowing a robust press and analyst community to challenge policy will be the test of the government and the will of the people to exert their rights.
Key Conclusions: Manufacturing is the Only Way for India to Fulfill its Demographic Destiny.
India’s election revealed a people that were prepared to use the democratic process, rather than revolutionary process that is sweeping the Middle East, to demand radical change. That mission was handed to Mr Modi more so than his party or his colleagues. The execution of that mission has occupied Mr Modi in appointing his team and setting new ground rules. The fleshing out of what it means to deliver on the mission is clearly one of the most challenging tasks in a country of nearly 1.3 billion people and rising (to over 1.6 billion by 2050). One of the most fundamental requirements will be to employ the people in ways that are productive and fulfilling. The failure of India leaders to date has been in this most fundamental requirement.
Clearly, if the Indian leadership can implement a plan that creates a productive world class industrial base, the impact could be dramatic: India could close the manufacturing competitiveness gap with China within 5-10 years instead of 15-20 years and thereby achieve overall GDP growth rates of over 10%. Doing this would create in excess of 15 million new manufacturing jobs per year over the next decade thereby providing high quality employment to households comprising almost half of India’s population. Widespread modernisation and development for India cannot happen without industrialisation on such a scale because it is the only way the country can re-deploy its agrarian labour force which for decades has been under-employed. It is also linked to other critical structural changes India will need to make such as land and labour reform. While the services sector has attracted a lot of glory for India, it may prove to be irrelevant in the longer-term if India fails to take advantage of the opportunity to build a large industrial base which can be a genuine job engine.
Mr. Modi’s experience in Gujarat would seem to indicate that he is indeed the right man for the job, and his overwhelming majority has further given India an opportunity to break past the sluggish policy reform environment of the last 25 years of coalition rule. However, simply trying to replicate Gujarat’s success will not be enough to help India achieve this scale of a transformation. This will require a bold vision and strong and courageous leadership to help the country navigate through the national reforms and structural changes it will need to make to implement it. The government will need to simultaneously move on several policy fronts including reforming labour laws, mobilising domestic and foreign investment, streamlining clearances and approvals, accelerating the infrastructure build-out, implementing the national goods and services tax, while managing fiscal and supply side pressures on inflation to create room for lower interest rates. Making the necessary reforms early and comprehensively will be critical in ensuring that the benefits of these reforms flow through within the next five years – thereby providing the current government with a platform on which to seek re-election. It will also require some savvy, if not cunning, use of the real politik of India’s state-based power to implement the changes ahead of the national reforms being passed.
The path for India is clear: the only way it will generate growth and employment on the scale required to fully harness its demographic advantage is by creating a unique Indian model for industrialisation. No other large country has managed to create widespread prosperity without building a large industrial base. India’s industrial model which leverages the lessons of history and global best practices, like China’s, promises tremendous economic and social consequences for the country (see inset for some of the areas where it would transform India). However it would also re-position India in the geopolitical world order – making it a global economic powerhouse in both services and manufacturing, and hastening by several generations India’s rise into one of the largest and most dynamic countries in the world.
India| China | Industry | Manufacturing | Cost Competitiveness | Wages | Labour| Job Creation | World’s Factory
The “Asian Tigers” refers to the experiences of Hong Kong, Singapore, South Korea and Taiwan which maintained growth rates of 7% and above from the 1960s until the Asian Financial Crisis in the late 1990s building large industrial economies in the process Nominal per capita GDP in US dollars factors in relative movements in the INR and RMB
Source: “The East Asian Miracle: Four Lessons for Development Policy”, John Page, National Bureau of Economic Research (1994), available at http://papers.nber.org/books/fisc94-1
Source: United National World Investment Report 2014
According to a McKinsey analysis (“Fulfilling the Promise of India’s Manufacturing Sector”), over half of India’s large manufacturers do not return the cost of capital
Source: Reserve Bank of India, Gross State Domestic Product Report
Source: Planning Commission, Average real growth rate of GDP from Industry from FY2006-FY2014
Source: Steven J. Dickinson, Fredrikson & Byron, P.A. (Oct-2013)
 A lack of comparable data makes it difficult to incorporate the ease of doing business metrics (such as time and cost of exporting) into a unified manufacturing competitiveness framework
The most recent (Apr-2014) edition of the IMF’s World Economic Outlook estimates that India will grow at an average GDP growth rate of 6.4% between 2014-2019 (latest year for which projections are available)
Source: Economic Times, 9-June-2013
Source: Planning Commission of the Government of India, India’s poorest state (Bihar) had a per capita GDP of c.US$500 vs. US$3,500 for the state of Delhi (latest available data for year ending Mar-2013)
Source: Economic Times, 27-May-2009 (http://articles.economictimes.indiatimes.com/2009-05-27/news/27646670_1_gas-reserves-kg-basin-discoveries)
Based on analysis in previous issues of the Sign of the Times
Source: 2014 Freedom of the World Report, Freedom House
 The Chinese President’s term of office is five years. The president and vice-president are both limited to two consecutive terms, so ten years in total. The President is elected by the National People’s Congress which is China’s highest state body and has the power to remove the President and other state officers from office.