That does not mean that manufacturing cannot grow in India. In fact, manufacturing grew 10.8% in 2015-16 and 7.9% in 2016-17. Smart reforms such as the ‘Make in India’ policy along with recent achievements including FDI and labour law simplification, infrastructure investments and power sector reforms are targeting areas in which India has needed to make up ground. India ranks 130/190 on the World Bank’s Ease of Doing Business rankings (China is at 78 and Taiwan at 11). India is at 79/176 on Transparency International’s Corruption Perception Index (China has the same rank). On average it takes 30 days to set up a business in India; and most entrepreneurs reel under tax burdens, something that the government has tried to address through Goods and Services Tax (GST) reforms.
All of this is evidence that India’s manufacturing potential should be taken seriously. India’s rise in the latest Global Competitiveness Index is notable. In fact, when you compare India and China at similar stages of development, India is outperforming on a number of measures. Manufacturing will not provide the broad base of economic growth that it did in China, primarily because it is becoming less labour intensive globally. Yet, it can still grow in India provided progress on labour and infrastructure reform continues. That matters because manufacturing enhances India’s other strengths and the interplay between these factors is the key to India’s edge.
In fact, there is a simpler argument to be made. Namely that India is operating with such a range of inefficiencies that addressing these over time should naturally bring some growth in the economy. Consider that in recent years energy price subsidies have been almost entirely abolished, the monetary policy regime has changed fundamentally, large parts of the informal sector have integrated into the mainstream economy, a GST is in place and the banking sector is recognising and dealing with non-performing assets. All this has cost economic growth, particularly as the banking sector adjusts to much greater transparency about the value of its assets, but it implies that we can be much more confident about the base on which India’s growth is built; particularly as we consider China’s trajectory over coming years.
Where India really shines
India’s service sector continues to outperform China’s service sector and offers large potential for continued economic growth. It contributed 54% to the gross value added (GVA) in FY 2017 and is expected to grow at 8.5% in FY 2018, making it the fastest growing service sector globally. The IT sector is expected to reach annual revenue of USD350 billion by 2025 (Perspective 2025: Shaping the Digital Revolution) and India’s start-up system continues to expand and break into new territory.
Taken with India’s steps forward in manufacturing, the country’s potential starts to come into view. In June, Harvard Kennedy School’s Center for International Development (CID) released the latest edition of its Atlas of Economic Complexity, with growth predictions updated to 2025. CID Director and lead researcher Ricardo Hausmann commented; “India, Indonesia, and Vietnam have accumulated new capabilities that allow for more diverse and more complex production that predicts faster growth in the coming years.” The report calls out the strides India has made in economic complexity, saying “India has made inroads in diversifying its export base to include more complex sectors, such as chemicals, vehicles, and certain electronics.”
This increasing economic complexity presents a great opportunity in the form of connecting India’s traditional IT expertise to its newfound gains in manufacturing capabilities. Noting that manufacturing industries that are near their markets and supply chains tend to create long-term employment, the McKinsey Global Institute observed that “with India’s strong domestic IT capabilities, which are increasingly relevant in manufacturing, firms operating in the country can reach customers more effectively, streamline manufacturing processes, and create more efficient supply chains.” PwC suggests that for the hypercompetitive chemicals industry such efficiency may be vital to company survival, noting that integrating digital systems can reduce operating costs by 2-10% and capture gains of up to 25% in capacity utilisation.
The development of tacit productive knowledge (a.k.a. know-how) is critical to economic growth. With regard to harnessing global knowledge India has an ace in the hole: its diaspora. At about 16 million, the Indian diaspora is the largest in the world. Already, its remittances account for a stunning 3.4% of India’s GDP and its members frequently serve as ‘angel investors’ to domestic start-ups. Earlier this year the Modi government took steps to leverage this human capital with changes to Overseas Citizen of India (OCI) cards. The recent changes seek to facilitate further participation by overseas Indians in the economic and intellectual life back home; and it allows them to work in India for short or long periods and to own property, while retaining their citizenship of other countries. The large number of English speakers in India would seem to be a significant source of strength in an increasingly service-driven world.
The domestic market
Within India, advances in cities, on gender inclusion and in the digital economy are strengthening the dynamics of production and consumption locally and may be the start of bigger trends still; if the active reform program of the past 18 months has cost growth in the short term.
Homi Kharas at the Brookings Institution estimates that in the next decade the world will reach a tipping point where the middle class will be, for the first time ever, the largest income segment. A majority (88%) of these new billion entrants will live in Asia, leading to big distributional market shifts in favour of both India and China. India is projected to be the third largest consumer economy by 2025, with consumption tripling to USD4 trillion (BCG). In AT Kearney’s Global Retail Development Index 2017, India is ranked first for “its growing middle class and rapidly increasing consumer spending.” Growth of metropolitan city clusters, almost 50 of them, creates densely populated urban and semi-urban consumer bases and will drive 77% of the country’s GDP (McKinsey).
And there is still greater potential to be tapped. As the McKinsey Global Institute noted in 2015, only 17% of the country’s GDP was generated by women; in China, that number was 41%. According to the most recent World Bank data women make up just 27% of India’s workforce, compared to 63% in China and the global average of 49.5%. A host of factors including social prejudice and discrimination have led to this statistic. Over the past decade, important progress has been made: the gap between girls and boys at primary and secondary schools has been eliminated. Efforts are underway to sustain and advance progress on gender equity, from the central government’s ‘Save the Girl Child’ policy, to the work of NGOs and state governments. In June, the United Nations awarded first prize for Public Service to West Bengal for its policy of offering cash transfers to retain girls in school.