With the call for ‘Make in India’ campaign by Prime Minister Narendra Modi, many industrial countries in the world are now exploring the possibility of making India a manufacturing hub. In the last few years China’s manufacturing capacity has hit stagnation, owing to the growing labor cost and its discouraging policies towards foreign companies. And in the recent weeks, China’s economy has started to show signs of weakness that could probably systemic in nature. Countries like Japan and Taiwan that have traditionally setup manufacturing units in China have slowed down their investments into that country for last three years. Most other East Asian giants are now looking for alternative destinations. This could be a golden opportunity for India if it positions itself proactively, both as a growing market and a preferred manufacturing destination.
India happens to be one of the fastest growing markets on the planet adding millions of consumers to the global market with each passing year. Due to availability of non-agricultural jobs in expanding industrial and urban areas in the last two decades, India has been creating one of the world’s largest middle class groups through economic upward mobility. Nearly 120 million Indians moved into the middle class during 2004-2010 – that’s more than one-third of US population. And according to the World Bank, India may have a billion people in the middle class by 2025.
One of the modern trends of Indian middle class has been its growing appetite for consumer electronics. Gadgets like TV, PC, Mobile Phone, which were considered luxuries few decades ago, are now considered basic necessities. And India’s young and ambitious population is ready to spend twice the monthly salary to own an electronic gadget that has two years of lifetime. Plus the Indian businesses are buying more telecom equipment gear and enterprise electronics each year – already our communication equipment import exceeds USD 30 Billion.
Right now, India is consuming USD 100 Billion worth of electronics, about 5% of our GDP, and this is increasing at CAGR of 37% to reach USD 400 Billion in five years, soon to overtake oil as India’s biggest import. Alarmingly, the bulk of this consumption is met by imports. The current domestic electronic production is increasing at a snail pace of 15% further widening the yawning gap with the domestic consumption.
India is creating one of the world’s largest workforces on the planet – adding 13M each year; out of which 1.5M are engineers. Thanks to the demographic dividend, India has the largest youth population in the world, and it will continue to do so. While more than two-thirds of India’s population will be younger than 45 by 2035, nearly half of China’s population will be older than 45 – mostly due to their one-child policy. This is an opportunity and as well a challenge for India. If this nation can increase its manufacturing base, it could provide employment to this growing workforce; and if it doesn’t, it could create large scale unemployment leading to discontent. Of late, many manufacturers in China bemoan that they are finding it tough to hire qualified labor at reasonable cost. With India’s wages roughly at two-thirds of China, it offers a competitive advantage.
How India reacts to this unique opportunity offered by changing dynamics in the manufacturing sector in Asia will decide the next three decades of its economic growth. Modi’s government started off the ‘Make in India’ campaign in the right direction by creating a differential duty structure to mobile phones and tablets thereby encouraging manufacturing in India. Already fourteen mobile manufacturers have evinced interest in making their phones in India. Recently Foxconn, world’s largest electronic manufacturer, announced USD 5B investments. Learning from this, the central government should extend the same differential duty structure to all consumer electronics and telecom equipment. This will spur local manufacturing on an unprecedented scale.
An even better option is to extend tax holiday to electronics manufacturing akin to what India did to software services for nearly twenty years that created a USD 80B export industry. While India already captures more than 50% of world’s software outsourcing market, it contributes to less than 1% to the global 2 trillion dollar electronics industry. Also, it is time for some radical thinking to boost manufacturing across all domains. India could reduce the corporate tax for manufacturers from the current 30%-40% to a flat 17% like in Taiwan. While this may look like a huge loss in receipts, it will actually increase the manufacturing base and employment base compensating for the loss many times over.
Nowadays States in India have realized the potential of manufacturing industry to boost their GDP and provide employment – they have been wooing investors as if they are in a race. We already see states like Telangana going a step ahead in the game, creating one of the friendliest industrial policies and pragmatic tax exemption structures. Such a competition is in fact quite healthy where each State offers aggressive tax subsidies and incentives. While moving towards GST, New Delhi should allow each state to reduce the taxes while capping the upper limit. This flexibility will allow the states to choose what kind of industry they want to pursue. While some may incentivize automobiles, some may choose to pursue electronics, while some may pursue chemicals, textiles, or pharmaceuticals.
India could learn a lot from Taiwan Miracle. An island that had per capita similar to that of India fifty years ago is now one of the Four Asian Giants. With a population less than that of Chhattisgarh, it has a GDP nearly half of India. Most importantly, Government of Taiwan played a pivotal role in the rapid industrialization and growth of economy, starting off with a series of bold initiatives three decades ago. With state incentives to SME industry, tax subsidies to manufacturing units, R&D grants, and establishment of premier industry research institutes like ITRI, Taiwan promoted entrepreneurs and businesses units to create companies like Foxconn that employs 1.3M people, nearly same as that of Indian Railways, earning USD 148 Billion. Taiwan Government created Hsin Chu Science Park that hosts public funded companies like TSMC and Mediatek which take up 64% market share in global semiconductor manufacturing.
By being proactive, India could take this opportunity that is striking on its door to take on the next wave of high tech manufacturing to boost its economy and provide massive scale of employment to its youth. And the Government of India has to play an important and vital role.
[About the author: Sujai Karampuri is Director Electronics with IT E&C Ministry, Telangana]