India and Manufacturing

Daniel Altman begins his column in the International Herald Tribune (June 3rd, 2008) “India seeks it owns path as a manufacturing powerhouse” with:

For a few years now, a facile dichotomy has made the rounds in economic circles: Among developing countries, China means manufacturing and India means services. Yet several leaders of the public and private sector in India see the country’s road to riches leading through manufacturing as well.

Good to see that the leaders are waking up. For some years I have been arguing that India’s development cannot be assured unless the agricultural component of the GDP falls further and the share of manufacturing goes up. Note, I am only taking of the relative — not the absolute — decline of the agricultural sector both in terms of value of output and the labor involved. The productivity of the ag sector has to go up, together with the absolute output. Which is another way of saying that labor has to be released for the other sectors, primarily the manufacturing sector.

(See The Importance of Agriculture in GDP (April 2004), Agriculture and Development — Part 1 (January 2004), and Agriculture and Development — Part 2 (February 2004) for more on this topic.)

The development story goes this way, as I see it. Making agriculture more productive raises food production, raises per capita incomes in the sector, releases labor, and gets the whole machinery of development going. The labor released has to be urbanized. Why? Because manufacturing requires an urbanized population. Manufacturing also requires education, which can be more efficiently provided in urban locations. Indian cities are overflowing. India needs more cities. We have to actually go ahead and build them. Not just SEZs (special economic zones) but real honest to goodness new well-planned cities. Quote from the IHT article:

Another concern is that SEZs may be too small for the hundreds of millions of workers who could drive the Indian manufacturing sector.

“Scale economies don’t arise,” said Atanu Dey, chief economist of Netcore Solutions, an information technology company started by Rajesh Jain, a well-known serial entrepreneur. India needs to plan new megacities, he said, with far more capacity than what they may need today. [Emphasis mine]

It is easy to observe that generally India is always behind the curve, always trying to catch up. For instance, only when the present city or road or whatever is totally packed 200 percent beyond capacity that we start thinking of adding capacity. By the time that additional capacity comes online, it is instantly inadequate and congested. What I would love to see one day is for India to build something that is more than what is needed today and that which can easily accommodate the anticipated future demand.

I want to see India build cities not just for today’s urban population but for all those who are going to migrate to cities in the next 20 years. Of course, you don’t build all the buildings and the roads and keep them empty for a decade. What you do is to have expansion planned for and possible. I weep when I see the heroic and expensive efforts they are making in Mumbai to squeeze just another square inch of space for roads and other transportation infrastructure. No one, even as recently as 25 years ago, ever appears to have given some thought to how the city was going to grow and thus plan for space in Mumbai for building roads.

Moving on, I cannot resist riding my favorite hobby horse: the government’s job is to hinder whatever good things that Indians can do.

Anand Mahindra, vice chairman of the Mahindra group, is quoted with reference to the IT services sector success in India, “There were no regulations to impede them, because no one knew what kind of animal the industry was.”

The government had all sorts of regulations to impede manufacturing and it succeeded in “breaking the kneecaps of anyone even looking cross-eyed at doing something useful in manufacturing” as I like to put it.

Anyway, what India needs is a robust manufacturing sector. And that means India needs energy. And so does everyone and his brother, including China. Dan quotes yours truly:

“That is the biggest constraint in India’s future,” Dey said. “India’s economic growth rate could stall. I don’t know if it can compete with China in securing those energy resources.”

One thought on “India and Manufacturing

  1. Amit Thursday June 5, 2008 / 9:56 am

    And whatever new cities are built, they should be designed with ecology and environment in mind, with a low-impact footprint – basically, green cities. Community gardens in every neighborhood where people can grow vegetables, easy composting of organic waste, lots of trees (there’s research that shows trees in the neighborhood help in reducing stress, and some correlation between more trees and lesser crime), excellent public transport system, designing of roads while keeping bicycles and pedestrians in mind instead of an afterthought, no dependence on a car to get basic chores done, gravel instead of paved in parking lots to allow rainwater to replenish the water table, LEED-certified housing etc. (Did Ambani even think of this last one when designing his grand house? If not, what an effing waste of opportunity and setting an example.)


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