Ravi Bhoothalingam, Honorary Fellow, ICS
A version of this article was originally published in Chinese as ‘中国为何应支持“印度制造”’ (Zhongguo weihe ying zhichi “Yindu zhizao”), 第一财经 (Yicai), 4 April 2017. This is part of a series by Indian scholars in China’s top business affairs news portal facilitated by the ICS. The Chinese version follows below the English text.
“Make in India”—a signature campaign of Indian Prime Minister Narendra Modi– was launched in late 2014 with the objective of transforming India into a dynamic global manufacturing hub, and thus radically enhancing employment and the prosperity of the Indian people. Just a few months later came an announcement from China’s State Council of “Made in China 2025”—a set of eight policy measures to re-orient the Chinese manufacturing sector in line with the country’s economic structural adjustment program. So, are “Make in India” and “Made in China” competitive programmes which coud drive another wedge between these two nations?
To answer this question, we need to understand the nature of both “Make in India” and “Made in China” more closely. The fundamental idea behind “Make in India” is sound and unexceptionable. Those nations that evolved into becoming manufacturing powers from early beginnings as agrarian economies, saw a rapid rise in their economic growth, employment and prosperity. Whilst the Industrial Revolution in Great Britain is the most quoted example, the most recent and dramatic experience is that of China. The exceptions are thinly-populated States abundantly endowed with natural resources. Having achieved very high levels of prosperity even without an industrial base, these countries now find themselves at the mercy of price fluctuations of those very resources.
Where does India stand in the manufacturing ladder today? From the 2014 World Bank figures, the share of the manufacturing sector in value-added terms in India’s total GDP stands at 17%. In comparison, Thailand is at 33%, Indonesia at 22% and Sri Lanka at 18%, whilst Vietnam and Bangladesh keep India company at 17%. China (31%) and Korea (30%) remain the leaders, and China’s strategy through “Made in China” is to move its manufacturing sector into higher value-added areas through R&D, innovation, sustainability, marketing and structural reforms.
Manufacturing is much more than creating widgets in some smoky factory, with toiling workers driven by heartless owners. It is a complex matrix combining two vital processes. One part applies human labour, technology and ingenuity to raw materials, to create saleable goods. The other connects these goods with markets where customers are willing to buy them. Therefore, if “Make in India” is to be a success and attain its goal of 25% share for manufacturing in its GDP by 2022, India must ensure the coordinated working of expanded and improved infrastructure, logistics, skilled manpower, innovation and R&D. Two final elements are “the ease of doing business” (to eliminate administrative bottle-necks) and “connectivity” to link India’s factories to markets – both domestic and international.
This is where China fits in. Right now, China is rebalancing its economy away from investment (with huge idle capacity, there is a low return on China’s investment) to consumption (to ensure higher living standards for the Chinese people). Where can China invest its considerable foreign reserves and earn better returns than it does in U.S. Government bonds? Yes, in India! And India, on the other hand, needs vast investment –about US$1 trillion over the next 10-15 years – in infrastructure, transportation and heavy industry to support “Make in India”. And where else to source this investment but from China? Further, India has a stable political environment and a good investment climate with the necessary regulatory controls and legal processes.
India is a large market and the “Make in India” programme further offers China the possibility of profitably manufacturing in India items that rising Chinese labour costs render unviable at home. But “Make in India” does not envisage India as just another low-cost manufacturer. Rather, its combination of plentiful labour, skill development and digitalisation is designed to make India the centre of ‘smart low-cost manufacturing’. This means that India’s competitive advantage will be low cost but not through just cheap labour, because digital applications will greatly enhance labour productivity even with mass employment.
At the same time, China can source some of its consumption needs from India. Take medicines. India is rightly called the ‘pharmacy of the world’ with more than 40% share of the U.S. generics market. The healthcare bill for Chinese families can similarly be significantly reduced if China buys Indian generic pharmaceuticals. China is also a large supplier of the world’s outbound tourists. India is practically a virgin market for Chinese tourists and it is nearby, inexpensive, with an ancient culture and a large-hearted tradition of welcoming guests. Tourism to India can fulfil a large part of China’s future demand for leisure consumption in an enjoyable and cost-effective way.
Through “Made in China”, China intends to move up the value chain through the special development of seven strategic high-technology sectors. Here, China may find that Indian management and technical skills – recognised the world over – fill a gap. Indeed, in a recent article, China’s Global Times has admitted that China has neglected to tap the Indian talent pool for management skills and I.T. talent to power its own manufacturing upgradation.
Therefore, it appears that “Make in India” and “Made in China” are not competitive but actually complementary. India and China need to engage in a comprehensive economic engagement which will embrace both investment and trade, tourism and services. Being the 2nd and 4th largest economies in the world, the more they connect, the greater opportunities there will be for both: for India to tap China’s investment surplus, and for China to use India’s manufacturing and service sectors to raise China’s own consumption levels. The two countries must seize this opportunity, for the sake of their future generations.