Can Manufacturing Be the Messiah?

The round of downgrades in India’s projected growth rate continues, the latest being the IMF which significantly reduced India’s expected growth in 2021-2022 from 12.5% to 9.5%. This follows the economy’s massive 7.3 percent contraction in the past fiscal year. This, of course, raises concern about the speed of the economy’s recovery in the near term. However, there is also great concern about the long-term outlook for the economy which we cannot eliminate.

There aren’t many noticeable economies of size outside of North America and Western Europe that have entered the high income category. The few exceptions are in Asia, including Japan, South Korea, and a few island nations. China is not there yet and India is barely in the middle-low income bracket. But, there was hope: hope that India will be able to do it – provide a decent standard of living for over a billion people, lift millions out of poverty, end malnutrition, preventing millions of premature deaths. The question is can India still do it?

The government relies heavily on the industrial policy of increasing manufacturing output and encouraging manufacturers to locate in India. In particular, it’s a safe bet that manufacturers will leave China, and that India may attract some. But, his hope could be misplaced. It is true that the global economy, which has relied heavily over the past four decades on cheap, low-quality products from China, is changing. Part is driven by global geopolitics in which we are likely to see sustained rivalry between the United States and China for the foreseeable future. However, much of the change is brought about by the rapid demographic change that China has experienced and the technological change that we are witnessing across the world.

In 1978, when China opened up its economy, the old age dependency ratio was 7.67. There was a massive supply from the working age population. They were unqualified, the average number of years of schooling was less than four years, and the tertiary enrollment rate was 1.1% in 1980. The Chinese currency experienced a steady depreciation until ‘in 1994 and remained at this level until 2005. This meant that China could produce primary education. low-tech goods or products in large quantities and supply them to the world at a very cheap price. For example, textile exports from China skyrocketed in the 1980s. On the other hand, in the United States in the 1980s, there was a great desire to keep inflation low. low. The US economy also grew steadily during this period of great moderation starting in 1984. This meant that the US economy and the Chinese economy complemented each other and both benefited from their trading relationships.

The situation is now very different. China’s one-child policy has led to a rapid aging of the Chinese population. Old age dependency in 2020 was 17.02 and the working age population is shrinking. They are also much more qualified. The average number of years of schooling has more than doubled and enrollment in tertiary education exceeds 50%. The currency has appreciated since 2005. The composition of trade has also changed dramatically. China’s top export in 2019 was broadcast equipment, followed by computers and integrated circuits. So, is China abandoning manufacturing? The answer is categorically no. China is still a great manufacturing power and it is still passionate about manufacturing, just that it gradually turns into manufacturing products with a high-tech component.

However, that does not mean the exodus of low-tech production, as much of the change has already happened in countries like Bangladesh and Vietnam. And, more importantly, the world might simply lose its appetite for cheap, shoddy goods with rising inflation and shifting consumption patterns across the globe. Competition between countries is now focused on high-tech manufacturing. And, recent flaws in the production line caused by the chip shortage have made this urgent. The US is also in this game and is making big investments. So, there is a change in the relationship between the US and Chinese economies, it is now entering a stage where potentially they are in competition.

Where does that leave India? India has a large working-age population base, but it is not very skilled. The average number of years of schooling in India is still only around six years, which could have been attractive for low-tech manufacturing. However, the cost of doing business is still very high. This means that even if the residue of low-tech manufacturing leaves China, India is unlikely to benefit. And, given the low skill levels, it is unlikely to attract high-tech manufacturing. This is clear from the fact that there is no manufacturing facility in India, and it is highly unlikely that a real manufacturing facility will be set up anytime soon. So, it is really hard to see large-scale manufacturing being the messiah of India’s large labor force looking for a ticket to a decent living. If the government tries to enforce this through high tariffs and other safeguards, it could cost the economy more, with consumers paying high prices for poor quality products.

So what can India do? There has to be a two-pronged approach, one for the short term and one for the long term. In the immediate future, we will have to play on our strengths, which are the services. As the world moves towards a digital future, India can truly become the back office of the world. There is another area where we can potentially excel, given our distribution of skills, and that is manufacturing services. Manufacturing can be supported around the world through design, testing and validation, automation, user experience, research, analysis, and more. This may be the path to high tech manufacturing in the future. What is the role of government in all of this? It urgently needs to put in place IT and data laws and policies to balance privacy, data protection, security, openness, and industry needs.

What needs to be done in the long term is much clearer, but no less urgent: to invest heavily in education and training. While the private sector has a big role to play in this regard, governments, both state and central level, will need to do a lot to ensure that citizens have a chance to escape the low income trap. . This must start from school education, both in terms of quantity, but also very important in terms of quality. If this happens, there is still hope.

The author, Dr Partha Chatterjee, is Professor and Head of the Department of Economics at Shiv Nadar University, Delhi-RCN. The opinions expressed are personal.

(Edited by : Kanishka Sarkar)