India: Factory owners urged to raise ambitions for export success

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At first glance, it looks like good news for India: an Indian carmaker announced this month that it sold more vehicles than ever last year, China overtook the UK as its biggest market and the company is planning to hire another 800 workers for its factory.

Unfortunately for India’s millions of jobseekers, the plant is in the English Midlands. The company is Jaguar Land Rover, the luxury car manufacturer owned by India’s Tata Motors.

Indian corporations do make cars at home as well, of course. But India’s failure to adopt enough of the large-scale, labour-intensive manufacturing that has propelled the successful development of China and other east Asian countries is now regarded as one of the greatest weaknesses of the Indian economy.

This shortcoming is obvious to anyone trying to shop for manufactured goods in one of Delhi’s “markets”, which in reality are collections of tiny, overpriced stores that thrive because successive governments have resisted the building of department stores and supermarkets, particularly foreign ones.

A search for a basic household smoke alarm – an essential safety device in a land of shoddy electrical installations and frequent fires – is met with blank stares from shopkeepers, until finally the object is located and ordered from a distant warehouse, arriving three days later at three times what it would cost in London. It is – like many other electronic and electrical products sold in India – made in China.

Some Indian intellectuals were mortified last year when neither President Barack Obama nor Mitt Romney mentioned India in the US presidential election debate on foreign affairs, but they know that India lacks international clout in part because its economic weight is not commensurate with the size of its population of 1.2bn. Economists reckon that the failure to accompany trade and product market liberalisation with reform of markets in the “factors of production” – particularly labour and land – is the biggest obstacle to investment in manufacturing and the accelerated job creation and gross domestic product growth that it would bring.

“Product markets are reasonably open, reasonably competitive,” says Shankar Acharya, former economic adviser to the Indian government. “What’s missing in India in a huge way is a large factory class.” Over the past four decades, he argues, India, like China before, should have become a big producer and exporter of clothing, shoes and toys. Instead, highly restrictive and old-fashioned labour laws have undermined the advantages of India’s low nominal wage costs and discouraged formal employment, driving employers to hire casual labour and keep their firms as small as possible.

“Manufacturing units in India are discouraged from growing beyond the very small scale,” says Mr Acharya. “We’re not exploiting our comparative advantage.”

Economists Jagdish Bhagwati and Arvind Panagariya make the same point in their book India’s Tryst with Destiny: Debunking myths that undermine progress and addressing new challenges (Collins Business, 2012). They analyse data showing that nearly nine in 10 jobs in the Chinese textile industry are provided by medium-sized or large firms, giving them an advantage in export markets. In India, the proportions are reversed, with almost all workers employed by small enterprises.

“It is ironic that in a country with nearly 470m workers, all evidence indicates extreme and even increasing reluctance of Indian entrepreneurs to employ unskilled workers,” write Messrs Bhagwati and Panagariya. Only about 10m Indians are employed in private sector companies with 10 or more workers, although 10m young people are joining the labour force every year.

Labour laws are not the only problem for businesses. Add in India’s notorious bureaucracy, poor transport and electricity infrastructure (last year the north of the country experienced the biggest power cut in history when more than 600m where without electricity for the best part of two days), and the occasional imposition of retrospective taxes and you have a recipe for driving away both Indian and foreign prospective investors.

Large companies with deep pockets are so awed by the potential future size of the Indian market that they usually persevere.

For example, MeadWestvaco, the US packaging group, is taking a bet on the inevitable growth of the consumer goods market in India, buying a local packaging company and announcing plans for a total of more than $180m of investment over five years.

Walmart, the huge US supermarkets group, has invested in the wholesale trade and is hoping to start in retail following the easing of government restrictions on foreign investment in the sector. Indeed, the US company is being investigated over accusations that it has already secretly invested in supermarkets in contravention of the ban previously in force.

Population growth, farming, government services, frantic construction and real estate activity and the modern outsourcing and IT services sectors will ensure robust growth for the Indian economy in the coming years in all but the direst of political crises.

Already there are signs that GDP growth, which retreated steeply from more than 8 per cent a year to less than 6 per cent in 2012, is starting to pick up again.

That is faster than many emerging and most developed economies, but those who study India’s economic progress say growth would be faster still if the government’s reforms were to extend to the markets for labour and land and so unleash the billions of dollars of manufacturing investment that the country needs.

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