India’s Day Dreams of Emulating China

Simon Denyer

It was supposed to be the motor for the next phase of India’s economic resurgence, but the country’s manufacturing sector has hit a brick wall, according to new data released Thursday.

Dragged down by a sluggish manufacturing sector, India’s economic growth rate slowed to 6.5 percent in the 2011-12 fiscal year, its slowest rate in nine years and well below the 8.5 percent recorded a year earlier.

Many countries would consider that an impressive performance, but for a country that dreams of emulating China and pulling hundreds of millions of people out of poverty, the slowdown has come as a shock.

Manufacturing grew by just 2.5 percent over the entire year, and actually contracted in the final quarter of the fiscal year compared with a year earlier.

India’s economy had recorded breakneck rates of growth over the past decade, but unlike the other Asian miracle economies, it was built more on a vibrant services sector than on a take-off in manufacturing.

India’s ailing and overburdened infrastructure, intermittent power supplies, clogged ports and potholed roads have long added to the costs of manufacturing here. But more fundamentally, the government’s failure to keep up with the private sector’s needs may have finally reached a critical point, with archaic land acquisition and labor laws acting as a major drag on the manufacturing industry’s investment and employment plans.

“The reason manufacturing is not doing well in India is reflective of the broader problems in the economy,” said Ruchir Sharma, head of emerging markets at Morgan Stanley and author of “Breakout Nations,’’ a book that questions the notion that the BRIC economies of Brazil, Russia, India and China are guaranteed rosy economic futures.

“There is too much land in agriculture, the land acquisition laws are complicated and labor law is very primitive,” he said.

A stalled plan

As a share of the economy, manufacturing has risen only marginally — from 13 percent four decades ago to around 16 percent now — compared with more than 20 percent in many countries, such as Japan and Taiwan, at their peak and nearly 30 percent in China today.

In China, manufacturing has been an employment generator, pulling people away from agriculture and out of poverty, while manufacturing exports have earned the country a massive trade surplus.

By contrast, Indian employment growth has struggled to keep up with a rapidly expanding population. While there are little reliable data, unemployment levels appear to have risen in the past decade despite rapid rates of economic growth, and the trade deficit has widened sharply as growing consumer demand has sucked in manufactured goods from abroad.

The government says India needs to create 220 million jobs by 2025 as more young people enter the labor market, and that the manufacturing sector will have to carry most of the burden.

Every new manufacturing job creates two or three jobs in related activities, it says, aiming to raise manufacturing’s share of the economy to 25 percent by 2022 under a new National Manufacturing Policy.

“We need the manufacturing industry to be much more dynamic than it has been in the last 20 years,” said Arun Maira of India’s Planning Commission. “We need much more jobs growth.”

But nearly a year after the plan was unveiled, little has happened.

Kumar Mangalam Birla, one of India’s most successful business leaders, has built up the family firm, the Aditya Birla Group, into a $35 billion conglomerate that operates in 33 countries and gets 60 percent of its revenue from abroad.

But Birla is frustrated by the government’s policy “flip-flops.” His own plans for a steel refinery in the western state of Madhya Pradesh were thrown into chaos two years ago when the government withdrew environmental clearances and canceled an allocation of coal the plant required.

Birla said business leaders have gotten used to building their own ports and roads and supplying their own power, but this was a step too far.

Taking over the company at age 28 in 1995 after the death of his father, Birla diversified abroad to access raw materials, technology and new markets.

The strategy was not about reducing his risk exposure to India, he said — until now.

“I would rather make an investment in Brazil than in India today,” he said.

Regulation maze

It is a trend that many Indian business leaders are now following.

One reason is it is almost impossible to obtain land to build factories.

For decades, the rich and powerful abused a colonial-era law that allowed them to throw farmers off their land for minimal compensation. But in the past decade, protests by farmers have stalled many projects, including the country’s largest foreign direct investment project, a $12 billion steel refinery in eastern India by South Korea’s POSCO.

The government has proposed a new land acquisition law that is supposed to make the process fairer and more transparent but could make land even more difficult to obtain, industry groups say.

Strict labor laws that date to the era of British rule and to India’s brush with socialism have also stymied industrial growth, making it difficult to fire workers. Economists say the laws have encouraged investment in capital-intensive rather than labor-intensive industries, though some companies get around it by hiring contract workers at lower wages.

As much as the laws themselves, it is the way regulations are implemented that frustrates many smaller industrialists.

A first-generation entrepreneur, Bipul Bedi went into business 20 years ago making auto parts in the city of Gurgaon, just south of Delhi.

His business has grown from “one man and one machine” to a $10 million concern today. But the maze of regulations involving different government departments, the lack of guidance and the attitude of bureaucrats have exhausted him. Now he plans to immigrate to Canada.

“They are just into fault-finding,” he said about many of the officials he encounters. “They just want to twist your arm somewhere, so that you have to put your other hand into your pocket.”

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