China's rising wages means India is in the reckoning
Given that more than half the world’s Deming awards (the Oscars for quality systems) have been won by Indian firms over the past decade, it’s obvious a fundamental shift is taking place in the cost competitiveness of the manufacturing sector—that’s why the share of engineering exports has increased from 15% of total exports in 2000-01 to about 22% in 2011-12. What comes as a surprise, however, is that while the National Manufacturing Policy (NMP) has laid out an aggressive annual growth of 12-14% and an increase of 100 million jobs by 2022, Indian manufacturing continues to slow every month. So while the policy envisaged the share of manufacturing increasing to 25% of GDP by 2022, the share has fallen to below 15% right now, the lowest since FY94.
The good news, as outlined in FE columnist Surjit Bhalla’s new book Devaluing to Prosperity, is that there’s a big opportunity for India. Bhalla spoke of how, thanks to the strengthening renminbi and a dramatic surge in China’s wages, India has a big gap to exploit—according to a CII-BCG study released on Tuesday, since 2009, Chinese wages have increased almost 15% per annum versus 1.8% for the US and 0.7% for the EU—not surprising then, that the world’s largest chopsticks factory is located in, if you please, the US. Indian wages increased 4% per annum. Which is why CII-BCG talks of a big opportunity for India to become the Germany of the East. At stake is $350 billion of incremental GDP and around 70 million jobs over the next decade—that’s the difference between business-as-usual scenario and the NMP targets.
The barriers to achieving this are well-known, and range from restrictive labour laws, poor infrastructure, low R&D spend, slow approvals, etc. The government has, to be fair, come out with some solutions—the land acquisition Bill, for instance, may get passed soon and the Budget could have more incentives for R&D … This, however, may not be enough since the NMP targets require India to get everything together ASAP—the National Investment Board has already been watered down and the land Bill has been criticised for increasing acquisition costs and making it time-consuming. The furore over FDI in retail is a good example of how we’re not getting it right. Anyone doubting it is a long-term game-changer in terms of developing India’s supply chains needs to just look at how Suzuki’s investment in Maruti catalysed structural changes in India’s auto sector, making India a contender in the global market for small cars.
CII-BCG outline what India’s competitors are doing to grab the space China is vacating—Mexico has announced the biggest shake-up in labour laws in the last 40 years, Thailand is investing big time in infrastructure and has cut corporate tax rates from 30% in 2011 to a planned 20% by 2013 ... As Bhalla put it at his book launch on Tuesday, China has given India a great opportunity, it is up to India to lose it. Just as it did the textile opportunity that opened up after the multi-fibre agreement was abolished in 1995.