Sunday, March 29, 2015

Manufacturing: China's loss may not be India's gain

India's manufacturing sector has disappointed in the past- it has failed to create the large number of jobs India needs. Many think that, with the right policies, India can grab a big share of manufacturing jobs out of China and into other Asian countries. This may not happen, as an article in the Economist points out.

One reason China is expected to lose is that wages in China have been rising rapidly. But China is offsetting this through use of greater automation- it has stepped up use of robots- and by massive investment in infrastructure. If productivity gains keep ahead of wage rates, Chinese manufacturing will remain competitive.

Secondly, the jobs that are moving out of China are moving into South-East Asia, which has close linkages to China. In other words, China is emerging as the centre of the Asian supply chain, with South East Asian countries on the periphery.

Thirdly, China is a big consumer of manufacturing goods, so locating production close to China reduced transport costs.

The article correctly points out that India does need to create more jobs in manufacturing. But job creation cannot happen merely by replicating the Chinese low-cost manufacturing strategy. Both services and agriculture will have to contribute to the process. As many have pointed out, India's strengths may well lie in knowledge-based manufacturing, not the light engineering that has been China's forte.

 There's one point the Economist overlooks. The revised GDP figures show that the share of manufacturing in GDP has been understated in the past. It's not 16% as thought earlier but around 25%. If these figures are to be believed, the 'challenge' of raising the share of manufacturing does not exist- it has already happened!

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