The Challenge of Manufacturing

In this chapter we analyze the reasons for the modest performance of Indian manufacturing despite its potential. In the analyses the contrast is with the East Asian “Tigers” and China, which all adopted Export Led Growth (ELG)”. In the process we characterize ELG as the simultaneous pursuit of both import substitution and export promotion and not the movement to laissez-faire as many assume it to be. ELG has its own macroeconomic aspect—undervalued currencies, low interest rates, and a growth rather than inflation orientation. The fact of idle labor in transforming economies makes it imperative to reconsider some of the tenets of both conventional trade theories and macroeconomics. We also bring out industrial and trade policy-related debilities on much of manufacturing—tariff inversions, excessive taxation. These had kept scales low and costs high. The prices of non-tradables especially infrastructure services and goods have been very high as well. For long years the export trade profitability was lower than the domestic trade profitability. More functional tariffs allowed the automobile sector to perform better. We also bring out how the vast demand potential in electronics, solar panels, computers, mobiles have been missed by crucial errors of policy. Similarly, we also bring out the perverse consequences of large positive deviation from the uncovered parity condition which not only increases the cost of capital for Indian businesses but puts them at a disadvantage vis-à-vis MNCs, which situation had been avoided by the East Asian “Tigers”. We list out the recent initiatives of the government, especially the Production Linked Incentive (PLI) scheme. The scheme we believe (though too early to analyze) could affect positively certain sectors. The changing global environment brought about by China being seen as an adversary by many countries including the US, China going “green” and China consciously moving into high-tech industries could act in conjunction with the PLI. The very success of ITES and the large remittances inflow act to create a “Dutch Disease” on manufacturing.