Can India reverse its manufacturing failure?

2024-11-10 05:00:00

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The writer is senior fellow, Peterson Institute for International Economics, former chief economic adviser to the Indian government and adviser to the government of Tamil Nadu

India’s rise as a major economy has long been held back by its failure to develop a robust manufacturing sector. The share of manufacturing in GDP has remained stubbornly low, even declining over the past decade despite the government’s enormous subsidy programme to encourage companies to “Make in India”. Can this failure be reversed, given the opportunity created by the stampede of capital away from China?

There are glimmers of hope. One state in southern India — Tamil Nadu — is experiencing a manufacturing boom, attracting the likes of Cisco, Corning, Foxconn, Ford, Google, Tata Electronics and Tata Jaguar Land Rover, and Nike suppliers. These investments are integrating India into global supply chains for electronics, automotives and footwear. What is the secret to its success?

There’s scope. The state’s manufacturing investments encompass a much wider range than elsewhere in India, notably including labour-intensive activities. This is puzzling, since Tamil Nadu is among the richest states in the country. So how can it attract labour-intensive manufacturing while much poorer states cannot? Essentially, because factories have been willing to tap pools of lower-wage workers, such as migrants from other Indian states and women. In fact, 40 per cent of all women employed in factories in India are in Tamil Nadu.

Then there’s scale. Several of the new projects will provide employment in the tens of thousands. This is astonishing in a country where the median company in labour-intensive industries employs just 21 workers, making it too small to be globally competitive.

Tamil Nadu — unlike India more generally — has also created the perception that it is a relatively easy place to do business. The state has long had a well-developed educational system, churning out hundreds of thousands of engineering graduates every year. This had made it the country’s manufacturing powerhouse, especially in automobiles and auto parts, which attracted considerable FDI in the boom years of the noughties. In addition, it offers generous incentives to investors.

But such incentives are available throughout India. The state’s talented engineers could be employed elsewhere. In Tamil Nadu, however, the state government has also grasped the critical importance of minimising risks to investors. There is a political consensus that once investors set up shop, they should not be subject to policy reversals, neglect, or discrimination.

Two examples are illustrative. In 2021, a food poisoning incident at an electronics plant seemed poised to become a full-scale political incident. The government swung into action, working with both capital and labour. It helped the victims speedily, thereby ensuring minimal operational disruption for the employer, and ensured that safety standards were upgraded.

Also in 2021, Ford announced it needed to shut production in the state. The Tamil Nadu government recognised market realities and helped Ford exit by resolving complex labour and land issues. That experience convinced Ford that risks of doing business there were low. So when the company decided this year to make a new investment in India, it again chose the southern state. The concept that easy exits incentivise enthusiastic entry has not been easy for Indian policymakers to grasp.

If India is to develop its manufacturing sector, this Tamil Nadu experience must be replicated in the poorer, populous heartland states of Uttar Pradesh, Bihar, Rajasthan and Madhya Pradesh, with their cheaper labour pools. To be sure, the governance challenges will be immense and India’s geopolitical window will not remain open forever. But the model is there for emulation.

Josh Felman of Principal JH Consulting contributed to this article

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**Interview with Dr. Suresh⁣ Kumar, Senior Fellow at the Peterson Institute‌ for International‍ Economics**

**Editor:** Thank you for joining us today, Dr. Kumar. India has struggled with manufacturing ‍for years, ⁣but ⁢Tamil Nadu seems ⁤to be defying this trend. What​ do you believe are ⁢the key factors behind this manufacturing boom in the state?

**Dr. Kumar:** Thank you for having ⁤me.⁢ Tamil Nadu’s success ‍in⁢ manufacturing can be attributed to several ⁤interconnected factors. Firstly, the state​ has ⁢tapped into ⁣a​ diverse labor‍ pool,⁤ particularly drawing from lower-wage migrant workers ⁢and a‍ significant female workforce. This ‌has ⁢allowed​ companies to hire labor more affordably while still benefiting ​from a skilled and educated labor market.

**Editor:** You mentioned the educational system as a crucial component. Can you⁣ elaborate on how this‌ plays into Tamil Nadu’s manufacturing success?

**Dr. Kumar:** Absolutely. Tamil Nadu boasts ‍a well-established educational infrastructure that produces⁣ a large⁤ number of engineering graduates each year. ⁣This consistent supply ⁤of skilled labor means that companies can find qualified workers‌ easily, ​which has ⁢been a crucial ‍factor in attracting foreign⁢ direct investment,‍ especially⁣ from major firms in​ the electronics and automotive ‍sectors.

**Editor:** It’s interesting that Tamil Nadu has managed ⁤to ⁤attract labor-intensive⁣ industries despite being one‍ of the richer states in India. Why do you ⁤think poorer states struggle in ‌this regard?

**Dr. Kumar:** Well, poorer states often lack the ‌necessary infrastructure, skilled workforce, and supportive ecosystems that ⁣facilitate ​investment. Tamil Nadu’s established reputation ⁤as a favorable business environment plays a significant role in ​its manufacturing boom. The perception that it is easier to do business⁢ in Tamil Nadu,⁣ coupled with government incentives for investors, creates a gravitational⁤ pull⁣ that other states haven’t⁣ managed to replicate.

**Editor:** In light of these developments, do you think there is potential‌ for other states⁢ in India to replicate Tamil ‍Nadu’s success, especially ⁣with ‌the ‍recent shifts in global supply chains​ away from China?

**Dr. Kumar:** Potentially, yes. Other states can learn from Tamil Nadu’s model by improving their infrastructure, focusing on education and skills development, and creating business-friendly policies. However, each⁤ state⁣ needs to tailor⁢ its approach based on its⁣ unique circumstances and ⁢strengths. The‍ initiatives taken in ⁤Tamil Nadu highlight the importance of an integrated approach⁣ that balances ⁣labor usage ⁢with⁤ education ⁤and investment incentives.

**Editor:** Thank you, Dr. Kumar.​ It‌ seems there’s‍ a⁣ balanced pathway for‌ other states to consider if they wish to bolster their manufacturing sectors similar⁢ to Tamil Nadu.

**Dr. Kumar:** Indeed, and with ⁣the right ⁤strategies and commitment,⁢ we could see a significant ​transformation across India’s manufacturing landscape. Thank‌ you for the opportunity to discuss this important subject.