The Government has announced a slew of measures to grow Indian industry. India must create many more jobs in manufacturing to enable average wage levels to rise. Low skill services and agriculture, which have been providing many jobs so far, have limited potential for high wages. A strategic imperative for growing India’s high value manufacturing sectors, such as machine tools, telecom equipment, and defense gear, is the country’s security.
In 1990, India’s and China’s manufacturing sectors were comparable. Now, China’s manufacturing sector is almost ten times larger. It is 27.2% of China’s economy (which is 4.8 times larger than India’s) compared with only 13.7% in India. More significant is the composition of manufacturing. In 1990, India was slightly ahead in machinery and capital goods production. Now China’s capital goods sector is over fifty times larger. Not only has China become the world’s factory for garments, shoes, toys, and other such lower value products in the last thirty years, it is also one of the world’s premier producers of electronic hardware, power equipment, and telecom gear—even threatening US security.
India has a lot of catching up to do across the manufacturing spectrum—in labor intensive sectors such as garments, as well as technology and skill intensive sectors. Some policy lessons can be learned from Bangladesh and Vietnam who are getting ahead in labor intensive sectors which are moving out of China. However, technology intensive sectors require more sophisticated policy packages. In the former, Indian factories can be plugged into global supply chains by reducing costs of production in India and improving logistics—access to ports etc. For the latter, enterprises in India will have to develop more complex management abilities and learn more complex technologies.
Conventional trade economists focus on ‘open markets’ to facilitate flow of materials across national boundaries in global supply chains. They also advocate easier flows of financial investments across borders. However, their theories are inadequate for facilitating flows of technologies across borders. In fact, global trade rules enable owners of technologies to protect their ‘intellectual properties’ and make it harder for enterprises in other countries who want to learn. Chinese firms who have learned to do what they could not do before, and do it as well as their foreign partners, are now accused of ‘stealing’ technology.
Indian factories—whether owned by Indians or by foreign investors— must become capable of producing complex products to global standards. They will have to become much faster learners to catch up with Chinese manufacturers who are now ahead. ‘Time to learn’ must become the metric to gauge the pace of industrial development. This was the metric the Japanese applied in all factories and industries after the World War. Their focus on learning faster than their larger competitors in the West enabled many Japanese industries to become globally competitive and stay ahead—in steel, chemicals, automobiles, electronics, etc. South Korea and Taiwan followed the same strategy of learning faster, catching up with the Japanese. Now China seems to have done it too.
Large factories within protected enclaves can plug India into global supply chains. However, the value addition in such factories will be shallow because the intellectual property will remain the property of owners abroad, who can move their simple production operations to other countries where labor costs are lower or where government subsidies are more. Lee Kuan Yew, the far-sighted builder of Singapore’s economy, had realized this. He had a time-based target too: to make Singapore the first fully developed Asian country besides Japan. He wanted wage levels in Singapore to rise, so that standards of living could improve. Therefore, from the outset, he had set his sights on establishing higher value manufacturing in Singapore than all his ASEAN neighbors, with concomitant levels of skill development. (Tatas of India gave some help: they set up a training school in the 1970s and a precision tool room to support Singapore’s industrial plans).
Rapid all-round industrial development in India, which has become a strategic imperative, requires India’s industry builders to have three capabilities:
1. Factory managers must learn how enterprises learn new capabilities faster. The discipline of organizational learning gives insights which economists cannot provide.
2. Factory managers and policy-makers must appreciate that human beings are not just ‘labor costs’ to be used and discarded. They are assets of the enterprise to be nurtured: humans learn, and they also enable the manufacturing system to improve its capabilities.
3. Trade and industrial policies must create space for domestic enterprises to learn faster. Merely throwing up markets to free competition from well-established producers, who are determined to protect their knowledge advantage, is not good policy for building learning enterprises in India. However, enterprises who do not learn within the time given must not be supported any longer. They must perish while faster learners carry on.
Time is running out. We must learn faster.
(Published in The Economic Times on 20th November 2020).