India: An Industrial Power
By Dr. Rizwana Rahim
Chicago, IL

In Keith Bradsher’s four-page article in the New York Times (31 August 06), there were enough indices pointing to the new kid on the industrial block: India.
There are inevitable comparisons with China in various fields, from workforce to infrastructure, but not a single reference to Pakistan in this long article. This wasn’t, perhaps, due to any tilt this way or that -- just that, unfortunately, Pakistan isn’t considered a serious competitor or contender in any significant industrial area, and thus was below the radar.
No longer just an outsourced calling-center for the American and British services or a land of computer programmers and software developers, far removed from an agricultural basket case of yesteryear, India is elbowing itself to the front line of industrial countries. Spending frustrating decades in trying to improve domestic economy, its focus has turned to what other Asian countries had been doing: manufacturing and export. Despite many problems, things began to change, and now, it seems quite impressive, even too good to be true.
In manufacturing goods, a 9% annual growth rate, compared to a solid 10% in service areas. A steady growth in export of manufactured goods to the US and other countries, and since it started from a relatively smaller base, the rate in terms of percentage seems faster than China’s. Foreign investors confidently poured enough money last year -- more than 66% of the total into the manufacturing (and not the service) sector of India. India’s export of manufactured goods is growing faster than China’s -- no longer the second banana to China .
Now picture this: tractors and color TV sets for India and exports to the US, manufactured in the dusty outskirts of Pune (by John Deere and LG Electronics); steel for ventilation shafts “in Philadelphia, high-rise structural beams in Chicago and car engine mountings in Detroit” in the northwest Hazira where camels still carry the goods (by Essar Group, with its own port to bring in iron ore, its own power plant for electricity, its output set to increase by 5-7x); General Motors and Motorola are eying South and Western India for building their plants; Posco of South Korea and Mittal Steel of the Netherlands (of the eponymous Indian-born multi-billionaire magnate) planning giant steel plants in eastern India where Reliance (India) is planning to build the world’s largest coal-powered power plants.
The foreign investment strategy may also be driven by some interesting, regional demographics: in about seven years, India is expected to have more 20-24 year old workers than in China, and by ILO estimates, in this age-group, 116 million more workers than in China (94 million). These Indian workers will have skills both in engineering and other relevant fields, as well as in the language (English), a major international marketing asset in a wide range of areas. Then, seven more years later, India will surpass China in population.
What helped Indian economy immensely was the deregulation. With a current 8% annual economic growth, there is considerable optimism that it would eventually overtake China (currently at 10%).
Despite all this, India is not a piece of cake for foreign businesses, or for that matter India’s own. Infrastructure (improving roads and transportation, electricity, ports facilities), still remains the chief obstacle: for every dollar India spends on it China spends seven-times more. India’s labor laws and practices have changed little since Independence, nearly 60 years ago. Corruption is pervasive as well as invasive, such that most efforts at improving the situation are either ineffective or insufficient; it continues to eat away the very insides of the economy and its promises.
The ratio of industrial production to total economic output of the country is an instructive ratio for comparisons, and here, India comes at 20% while China is twice that, but the increase in exported manufactured goods is faster that seen in agriculture and service areas, which means that the gap between China and India is narrowing. Government reduced the protected industry areas from 20,000 to mere 326 and lowered import taxes. High tariffs on imports and laws designed to protect businesses with less than 100 employees did create a huge number of small businesses, particularly in the villages for the women and minorities, but these protected businesses also turned out to be too small to be competitive, and slowed growth in the exported goods.
No other industry illustrates this problem better than the garment industry: Indian exports in this area were smaller than even from Bangladesh, and China, a state-regulated economy, where it is a major job-producing and growth area. Indian businesses, smaller than China’s, use leaner and more efficient Japanese manufacturing procedures, make higher quality products, and are more efficient. But inefficient transport and inadequate port facilities run up holding and storage costs. Removing these hurdles and bringing in more modern processes will speed up the exports and economic growth, but without creating many jobs.
In increasing number of industries manual procedures are being done by machines: Whirlpool factory in Pune uses machines, not workers, to fold steel exterior of the refrigerators: just over 200 employees produce some 33, 000 refrigerators a month – perhaps among the highest worker productivity of any Whirlpool factory in the world.
Working conditions in India are better than in the State-controlled Chinese factories. For instance, a comparison between the Hero Group, the largest producer in the world of inexpensive motorcycles and its Chinese competitor, Lifan Group: Hero is a protected business and caters to domestic needs (little or no export), while Lifan stresses exports. Hero factories have better health safety conditions than Lifan’s, Hero’s workers make more ($150) than a Chinese worker ($100) with more benefits and have effective unions as opposed to state-owned non-unionized Lifan.
But the biggest problem for India is again with the infra-structure to support the export of increasing number of products. Some ports, such as Nhava Sheva near Mumbai, are comparable to some of the US West Coast ports in terms of number of containers moved/hour, but are getting increasingly congested. Same is true of Chennai ports.
For Indian companies dealing with all corners of the globe, a reliable and efficient infrastructure is a must. Improvement in this area came faster in China, as its steel production surged in 2004. The Chinese response was effective, and money poured in (3x more within 6 months) --- ports got improved, new wharves constructed, and the economy grew (11.3 % in the second quarter this year, with inflation held at 1% more than a year ago). In India the progress on such improvements has been glacial by comparison.
By comparison, inflation in India was at 8% this summer, and new problems are emerging now, after three years of 8% growth. Frustratingly slow, India is trying to address the problems of its infrastructure and pervasive corruption things that keep it from realizing its potential. Its future lies not as much in calling centers but in its engineers exporting manufactured goods.
Bradsher’s article is well-researched, based on material from dozen-and-a-half business categories in 10 different places across India.


Editor: Akhtar M. Faruqui
2004 . All Rights Reserved.