The manufacturing landscape

On my previous trip, I had concentrated on India’s dynamic IT-enabled services sector.

India’s new service dynamic plays to some of the nation’s greatest strengths — education, entrepreneurial spirit and IT literacy.

In contrast, I knew nothing first-hand of the manufacturing story. A journey to Pune — 115 miles southeast of Mumbai and one of India’s major manufacturing centers — would change that.

I must confess I was also curious about the quality of the excursion. I had been told that the Mumbai-Pune expressway was Chinese-like in modern construction.

For a nation with a glaring infrastructure deficiency, maybe this would provide a hint of how India might close that gap.

A Chinese-like journey?

The physical experience of the drive bore little resemblance to several comparable journeys that I have made in China. It took about three-quarters of an hour to snake through the outskirts of Mumbai before we actually reached the expressway itself.

The road was certainly a huge cut above any other motor routes I had been on in India — especially the three-hour trek from New Delhi to Agra to see the Taj Mahal.

A long shot

But by Chinese standards, I would rank the six-lane, barely-divided Mumbai-Pune expressway a B-minus — at best.

There is a glaring shortcoming of India’s manufacturing solution — a mistaken impression of its job-creating potential.

The exit experience was even worse than the approach — a tedious drive on low-quality local roads to get from one company to another. And then there was the equally uncomfortable return-trip to Mumbai — all in all, a six-hour driving experience that left me exhausted, head-spinning, and with a sore back.

If this is progress in closing India’s infrastructure gap, the problem is even worse than I had imagined.

After my two trips to India this year, I am struck by the extraordinary paradoxes of its economic growth model. Despite the stunning successes of its IT services sector, India believes that prosperity ultimately will come from a thriving manufacturing sector.

A deficient model

I certainly understand this aspiration in one important respect. Unlike the IT sector, which hires India’s best and brightest out of its universities, manufacturing attracts the lower-skilled and less-educated — offering opportunity at the lower end of the income spectrum for a nation with a staggering poverty problem.

But the Indian manufacturing model, in my view, continues to suffer from three major deficiencies — a lack of infrastructure, a low national saving rate (a little over 20%) and anemic inflows of foreign direct investment (barely $4 billion in 2003).

A serious infrastructure gap

Of those constraints, the infrastructure gap is the most serious. Not only does it risk crimping the efficiencies of supply-chain management and nationwide delivery capabilities. It also raises serious questions about the transportation requirements of a dynamic export sector.

If this is progress in closing India’s infrastructure gap, the problem is even worse than I had imagined.

Services, by contrast, need none of the above. Moreover, India’s new services dynamic plays to some of the nation’s greatest strengths — education, entrepreneurial spirit and IT literacy.

Services also rest on a platform of e-based connectivity — offering an important end-run around a massive physical infrastructure deficiency.

False hopes of job-creation

But I have long felt that there is another glaring shortcoming of India’s manufacturing solution — a mistaken impression of its job-creating potential.

Two of the plant visits I made in Pune drove this point home. First, there was the Bajaj motorcycle factory — a most impressive facility that was using state-of-the-art technology — Japanese robotics enabled with Indian IT — and Japanese production techniques.

An Indian Detroit

The factory turns out 2.4 million two-wheel vehicles annually with approximately 10,500 workers.

Labor-saving productivity enhancement means that a manufacturing-led employment strategy requires huge scale success. That appears to be working reasonably well in China.

By contrast, in the mid-1990s, Bajaj needed a workforce of some 24,000 to produce only one million vehicles. Then there was Tata Motors — a jewel in the crown of one of India’s oldest and greatest companies.

The vast 510-acre Pune facility felt like an Indian Detroit — complete with a university-like training campus, design, engineering and testing facilities and vertically-integrated production and assembly lines for cars, light- and heavy-trucks, buses — and, of course, SUVs.

Yet, the Tata Motors workforce has also shrunk significantly over the past decade as its vehicle output has soared. In early 2004, about 21,000 workers produced 311,500 vehicles, whereas in early 1999, it took some 35,000 workers to produce 129,400 vehicles.

A labor-saving endeavor

These examples are indicative of the tough uphill battle India faces in achieving a manufacturing-led solution to its daunting unemployment and poverty problem.

Even as reforms accelerated over the course of the past decade, job growth in India’s manufacturing sector — which employs only about 11% of the nation’s total workforce — averaged just 2.1% per annum over the 1994 to 2000 period, identical to the sluggish pace over the 1983-94 interval.

A Labor-intensive service sector

In today’s intensely competitive world, manufacturing success is all about productivity prowess — and the capital-for-labor substitution strategies that are central to achieving such efficiencies.

Ultimately, India — like China — is a reform story. But reforms always require political will — never a problem in China but long a constraint in India.

Manufacturing has become an intrinsically labor-saving endeavor, even in low-wage economies such as India and China. Services, by contrast, remain labor-intensive endeavors. That’s especially the case for knowledge-based activities that are now driving the growth of India’s most vibrant service companies.

That concerns not just call centers and data processing facilities at the low end of the value chain, but also software programming, engineering, design and a broad array of professional services. These include lawyers, accountants, actuaries, medical workers, doctors, consultants and financial analysts at the upper end of the value chain.

A scale for success?

Labor-saving productivity enhancement means that a manufacturing-led employment strategy requires huge scale for success. That appears to be working reasonably well in China.

But given India’s deficiencies in infrastructure, saving and FDI, such scale looks extremely problematic for the foreseeable future, in my view. By contrast, labor-intensive services need less scale to drive job creation.

Creating job opportunities

The trick for India, of course, is to create enough job opportunities at the low end of the occupational hierarchy to avoid a situation of worsening income disparities between the haves and the have-nots. That’s no easy feat for a services or manufacturing-based economy.

By Chinese standards, I would rank the six-lane, barely-divided Mumbai-Pune expressway a B-minus, at best.

Ultimately, India — like China — is a reform story. But reforms always require political will — never a problem in China but long a constraint in India.

For a nation with a legacy of bureaucratic interference and a government that has a knack for "getting in the way," the immediate challenge is all the more important for India's new ruling coaltion.

It is equally important, however, not to lose sight of the longer-term issues. Yes, the Chinese growth miracle seems to have left India far behind. But India has over a dozen world-class companies, fully functioning capital markets, a solid banking system and a thriving enterpreneurial culture — all of which China is lacking.

Not another Chinese growth miracle

China's strength is resource mobilization. India's strength is a well-developed institutional framework. Success is an all too fickle commodity in the long history of economic development and prosperity. Who's to say which approach works best in the end?

For India, the last decade has seen extraordinary progress on many counts. Any backsliding on the pace of reforms would be especially painful in the aftermath of such impressive momentum.