Modi India 2018

UN Photo/Cia Pak
Prime Minister Narendra Modi of India addresses the General Assembly.

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Author: Suchi Kedia, Community Specialist, Regional Agenda – India and South Asia, World Economic Forum

Manufacturing is fundamental to a country’s economic success. Industrialization has driven the growth of many developed economies, boosting innovation and creating jobs. Workers migrating from farms to factories fuelled the economic miracles of Taiwan, Korea, China, Thailand and Singapore, reducing poverty and raising living standards. According to a research report by the World Economic Forum, over 70% of the income variations between 128 nations can be attributed to differentiated manufactured product export data alone. However, despite its past success, the traditional industrial model that propelled many economies into prosperity is now being challenged.

The Fourth Industrial Revolution, which fuses physical, digital and biological spheres, is transforming global production systems. Advanced technologies, such as the internet of things, artificial intelligence, blockchain, robotics and additive manufacturing, are changing the future of manufacturing. This future depends heavily on our individual and collective capacities to use the rapidly emerging technologies. Currently the odds are stacked in favour of developed nations, which have greater access to the requisite capital and skills to swiftly respond to the exponential speed of change. However, emerging nations have a unique opportunity to leap-frog to the next levels of development by identifying their comparable advantage across sectors and value chains and preparing for the future. This means investing in the right skills, innovation frameworks, institutional partnerships and policy frameworks.

Image: Statista

As the sixth-largest and fastest-growing large economy in the world, India boasts of a large and diverse manufacturing sector that generates 17% of GDP and 15% of the total employment in India. India’s manufacturing sector benefits from traditional strengths like cost competitiveness, a young and large workforce, natural resources that support a wide range of industry sectors, and a rich pool of English-speaking scientists, researchers, and engineers. The Global Manufacturing Competitiveness Index 2016, compiled by the US Council on Competitiveness and Deloitte, ranks India 11th out of 40 countries on its manufacturing competitiveness. It projects that by 2020, India will assume the 5th spot globally.

India’s government and Prime Minister Modi understand the importance of manufacturing in the country’s growth strategy. A series of initiatives, such as Start-Up India, and structural reforms in areas from tax to intellectual property rights have sparked global optimism about the Indian manufacturing sector and improved investor confidence. In the World Bank’s Ease of Doing Business Index of 2018, India’s rank shot up 30 places. Foreign investments have risen accordingly. However, manufacturing as a share of GDP has been largely flat since the Indian government’s economic overhaul in 1991. This is in sharp contrast with countries such as China, Thailand and South Korea where manufacturing now makes up around 30% of the economic output.

Image: World Bank; McKinsey Global Institute

Factors such as lack of adequate infrastructure, misalignment with global supply chains, inadequate innovation, and a quagmire of legal and bureaucratic procedural delays have worked together to stymie the growth and dynamism of Indian manufacturing. Advanced manufacturing technologies add another layer of complexity by posing a threat to India’s cost competitiveness. These technologies are offering significant productivity gains, thereby creating a new competitive advantage for countries that use them.

The World Economic Forum carried out a study on Country Readiness for the Future of Production Assessment in order to understand how countries are positioned to benefit from and shape the changing nature of production. According to this assessment, India performs well across drivers of production such as demand, global trade and investment. It benefits from a growing domestic market supported by a large middle class, increasing global demand for domestic products, increasing foreign direct investment and greenfield investment and fairly open and non-restrictive trade policies. However, India could do more to capitalize on transformative emerging technologies, according to the study. This would mean building a more robust institutional framework, a better technology and innovation ecosystem, and providing training to prepare its workers for the production systems of the future.

India has consistently improved its Global Innovation Index (GII) rankings since 2015. It has moved up 5 places since last year to rank 57th out of 126 countries, while coming first for ICT service exports. It demonstrates a remarkable innovation capability relative to its GDP per capita and has a high number of science and engineering graduates. However, according to the findings of a research conducted by OECD in 2015, India’s Gross Domestic Expenditure on research and development was only 0.85% of its GDP. This compares poorly with that of developed nations, which spend 2-3% of their GDP on research and development. India’s recent initiatives, such as innovation labs and incubation centers across the country, are a in the right direction by the government. Such efforts to modernize the manufacturing base must also extend to small and medium-sized companies, which play a vital role in India.

India has long enjoyed the competitive advantage of its low labour rates. However, in a technologically enhanced future, cost arbitrage alone will no longer guarantee growth. Instead, India should focus on its unique demographic advantage: it is home to one of the world’s youngest populations. By 2050, India is expected to account for over 18% of the global working age population. Over 100 million newcomers are expected to enter the workforce by 2022. This is a double-edged sword. The new workers will need to be trained, as will the existing workforce of almost 300 million to keep up with technological change. Government initiatives to develop relevant skills,technical and vocational training programmers, innovative approaches to industrial training, and enhanced public-private collaboration will allow India to reap the benefits of its unique demographic dividend.

Robust institutional frameworks, from effective contract enforcement to an efficient judiciary, are crucial for this process. India’s government has made strong progress in creating a more business-friendly environment. But it could take further measures to bolster its institutional framework and help its manufacturing sector prepare for the future, such as simplifying bureaucratic procedures and making greater use of digital platforms.

A thriving manufacturing sector could help India achieve its dream of emerging as a global power. With its well-developed industrial base, India can bypass several developmental stages and accelerate inclusive growth processes. But in order to seize the opportunities arising from the Fourth Industrial Revolution, India must continue to strengthen its existing capabilities, while developing newer ones. All stakeholders must work in tandem to build innovative and sustainable production systems with a long-term perspective that can benefit all. In fact, if India responds to the rapid disruptions with a sound and sustainable industrial strategy that balances economic growth and social mobility, it could provide a replicable model for other developing countries around the world.