India can become a manufacturing hub

We are talking about increasing manufacturing’s share in GDP from current 17.4% to 25% by 2025. What is the scale of output required and how can this be achieved? Consider the following details:

Even at 6% annual GDP growth rate, India by 2025 would need to expand its manufacturing value add (MVA) to US$ 837.7 billion and manufacturing gross output (MGO) to US$ 3.8 trillion to meet this target. Such large values will bring us in league of top manufacturing nations: China, United States, Germany, Japan and Korea. However, reaching there would require us to invest in the capabilities and products that go into the making of a true manufacturing nation.

Key factors

Most countries specialize in a select range of products. East Asian countries trade mostly in textile and electronic products while African and Latin American countries deal mainly in mining and agriculture related goods. China exports most products except very complex ones. However, it is Germany, Japan and the US that are on top of manufacturing and innovation pyramid and continue to develop most high end products.

What makes Germany, Japan or the US the new product development hub? These countries have meticulously invested in and hence accumulated large productive capabilities or advance manufacturing techniques which allows firms located in these countries to regularly churn out new products of ever increasing complexity. A driverless car can take shape in only in a country with deep institutional knowledge of precision fabrication, electronics, robotics, design, IT and many more streams. No firm, howsoever smart, can hope to develop this in Brazil or India or China. The position of Germany, Japan and the US will further strengthen with developments in automation technology and robotics which may soon make them competitive even in many low technology labour intensive products.

What should be the product development priorities for an aspiring nation? The central core of world manufacturing consists largely of complex metal, machinery and chemical products requiring most sophisticated development capabilities. The products under this group are considered related to each other as their development requires broadly similar core capabilities. This makes it easier for countries like Germany or Japan to redeploy the existing capabilities for development of a large number of new products.

While complex products are located in the densely connected central core of world manufacturing, less sophisticated products occupy a less connected peripheral space. These products either require low skillset (examples-raw materials, agriculture and mining) or specialized capability which is of use within the same product group (apparel, electronics) only. For a country that specializes in peripheral products, shift to other products is challenging. This rationalizes why East Asia or Africa manufacture only particular type of products.

A Country’s capability to manufacture complex products is numerically captured through the Economic Complexity Index (ECI). It ranks a country on the basis of how diversified and complex a country’s manufacturing export basket is. Germany is top ranker followed by Japan, while India ranks 54 out of 144 countries. Japan or Germany, with high ECI's, produce high end products that face less competition in the global market as these are highly unlikely to be produced by countries with low ECI. Countries like India with low ECI's produce goods that are commonly produced around the globe.

Becoming a true manufacturing nation or reaching large scale of manufacturing output would require India to develop capabilities in core products and also organize large scale production in peripheral products. This will require targeting the following 4 product groups. Each requires a different focus.

Targeted approach

Develop plan to manufacture factory machinery, the machinery that makes the goods. Development of one successful application changes the fate of nations. Machine tools have ensured decades of economic prosperity and also gave birth to large number of small and large firms in many countries. The semiconductor-making equipment (SME) is at the heart of today’s most import products/sectors: computer, mobile, telecom, and now automobiles, and internet of things. No country can enter big league without a share in this sector. Some of the technology required can be obtained through licenses or outright purchase but most critical can come only from the in-house industrial R &D centers.

Set up advance manufacturing facilities. Specialty materials, biologics, nanotechnology, precision mechanical devices, integrated circuits, high-end general-purpose chips, embedded systems, processors, medical imaging devices fall in this category. Developing capability in advance manufacturing would require leapfrogging mindset, deep commitment and long term investments in existing and new R&D institutions headed by professionals of proven capability. We can draw on our strengths in software products, engineering design and testing. India can also use the latecomer advantage to develop new products through imitation, reverse engineering and licensing. Korea is an interesting example of how a developing country can transition into a high income and high tech manufacturing country largely through government driven interventions. Korea largely focused on purchase of technology and providing subsidies on R&D investments made by the public and private sectors.

Facilitate setting up of large capacities to manufacture computer, TV, mobile phone and other electronic and telecom equipment. Manufacturing in China, Korea and Taiwan revolves around this product group which now account for over 15% of GDP of each of these countries. How China became the largest exporter in this sector is an amazing tale of shrewd policy interventions and business acumen. Starting in mid-1990s, China initially, did not choose products that required deep R&D or advance manufacturing as it did not have sound technological capability base then. Rather, it focused on electronics and telecom sectors where final products had modular structure containing large number of components and parts that could be imported from other countries. China tied up with suppliers in Southeast Asian Countries for sourcing of raw material and components, and Japan, Korea and Taiwan for supply of components requiring advance manufacturing. With Pre- Assembly inputs securely in place, China could lure anchor MNCs to invest in downstream stages of production. Abundant supplies of low-cost Labor, government incentives, tax exemptions and an efficient customs administration were other critical factors. By 2008, in less than 15 years China emerged as the leading exporter of electrical machinery, electronic and telecom equipment, the items once considered preserve of developed countries. Despite competition, India, is in better position today than China was in 1990s, as the required technology base, expert manpower and the firms that built up Chinese story are all present here.

Create large scale manufacturing facility for producing skill and labour intensive products. China has become leading exporter of auto components, Toys, furniture, footwear, apparels, mattresses, locks, low end engineering products by creating largest possible scale of organized production that ensured economies of scale. India can move quickly as the factories are easy to develop and can employ millions of people who can move from the agriculture or informal sector to the formal jobs.

Finally, for experts who argue for a services driven development path for India, remember services account for only 20% of world trade much of which is tied to products. Rest is all about products and developing still more new products.

The writer is from the Indian Trade Service. The views are personal