Why Can’t India Be More Like Bangladesh?

Bangladesh’s accomplishment is highlighted in a new report by Jonathan Anderson, the chief Asia economist for UBS, the global financial services company.  Mr. Anderson argues that, due to rising wage pressures, labor-intensive light manufacturing has begun migrating out of China to elsewhere in Asia, principally Bangladesh,Vietnam and Indonesia.  One result has been a great boost for the apparel and footwear industries in Bangladesh.  Anderson also finds that India, despite its vast reservoir of low-skilled workers, has been left out of this shift. 

The different outcomes between the two neighbors are worth noting.  Much of India’s future will turn on whether it – like China in recent decades – can fully exploit its comparative advantage as a labor-abundant economy.  But the trend lines are not promising.  The contribution of the manufacturing sector to the overall economy is strikingly low given the country’s stage of development.  Indeed, despite India’s remarkable economic rise over the last two decades, the current share of manufacturing to GDP is essentially where it was in 1991.  The share of manufacturing in India’s merchandise exports has actually declined from 72 percent in 1991 to 63 percent in 2008.  Manufacturing makes up less than one-fifth of national GDP, whereas in China it comprises a third.  In 2010, India contributed 2.2 percent of world industrial output, compared to China’s nearly 20-percent share. 

All told, less than 9 million Indians work in the organized manufacturing sector, an astonishing small figure for a country with such a gargantuan population.  And for all of the global accolades showered on the technology and business-services sector, it only employs 2.5 million workers, a minuscule faction of the overall workforce. 

To be sure, India is not without its manufacturing success stories, starting with the northwestern state of Gujarat.  With five percent of the country’s population, Gujarat accounts for around 15 percent of its industrial output and capital investment, as well as nearly a quarter of its exports.  The Ford Motor Company this week broke ground for a $1 billion factory in the state and French automaker Peugeot has just announced plans to build its own billion-dollar facility.  Given its rapid pace of industrialization, Gujarat is becoming known as the “China of India” and some hope it can play the same role in catalyzing Indian manufacturing as Guangdong Province did in China.

In Tamil Nadu, the southern city of Chennai (formerly Madras) has likewise emerged as a fast-growing hub for automotive production, so much so that some call it the “Detroit of Asia.”  Seven of the 20 top global automakers have a presence there.  India is also ranked second (behind China) in the 2010 Global Manufacturing Competitiveness Index compiled by the Deloitte consulting firm, and outside of Japan it has the largest number of winner of the Deming Prize, which recognizes major advances in quality control and management.

Important, too, the Indian government is about to launch its first national policy on manufacturing, which aims to boost manufacturing’s share of GDP to 25 percent and create at least 100 million new jobs by 2025.  The initiative would do this by establishing a small number of special zones within the Delhi Mumbai Industrial Corridor that runs through six states.  Manufacturing companies will have tax and regulatory incentives to set up in the zones, each of which is 200 square kilometers in size; the government has also committed to creating world-class infrastructure in these areas.  Anand Sharma, the commerce and industry minister, promises that this initiative “will help unlock the true potential of manufacturing in India.”

But the creation of these zones is dependent upon the enactment of a national policy governing land acquisition for industrial development.  Land issues have become a political hotwire, however.  Rahul Gandhi, scion of the Nehru-Gandhi political dynasty and widely assumed to be prime minister in waiting, is currently exploiting a land-use controversy to advance the Congress Party’s electoral prospects in Uttar Pradesh, the country’s most populous state.  Social activist Anna Hazare, fresh from his popular anti-corruption crusade that fixated India last month, also may now turn his sights to land issues.  Prime Minister Singh’s government has just submitted a much-awaited land reform bill but its fate is uncertain given the business community’s criticism and the bitter divisions within Parliament.

Yet even if the legislation passes, much of the resulting manufacturing gains will be in the skills- and capital-intensive sectors that are unsuited for significant job creation in a labor-surplus country like India.  Instead, major emphasis needs to be given to greatly expanding the number of factories employing the low-end labor India has in such abundance – enterprises like the ones that are now calling Bangladesh home.  Only these industries will be able to absorb the 200 million workers, mostly impoverished and under-educated, who will join the labor force over the next two decades.

Goldman Sachs estimates that, in order to employ all the new workforce entrants over the next 10 years alone, the manufacturing sector will need to create some 40 million jobs.  This will be next to impossible, however, without momentous reforms in India’s highly-restrictive labor laws.  According to the World Economic Forum’s 2011-2012 Global Competitiveness Index, India ranks 81^st in terms of labor market efficiency among a sample of 142 countries (China’s score is 36^th place.)  This rigidity is the result of onerous socialist-era labor regulations and policies reserving many manufacturing activities to small firms.  One consequence is that nearly 90 percent of manufacturing jobs are in small enterprises that as a whole account for only a third of total factory output.  Much of the industrial sector is unable to reap gains from scale economies and remains largely skill- and capital-intensive – a disconcerting anomaly given India’s raw demographic bounty.

A lot is riding on the manufacturing issue.  If the prodigious numbers of unskilled young workers now coming online are unable to find gainful employment, India’s societal stability will be in jeopardy.  And unless the country turns itself into a manufacturing dynamo, it will never fulfill its global ambitions.  Whether the political class in New Delhi can muster the requisite will to develop an industrial sector suited to India’s demographic profile is a perilously open question, however.