We are talking about increasing the share of manufacturing in GDP from the current 17.4 per cent to 25 per cent by 2025. What is the scale of output required and how can this be achieved?
Even at 6 per cent annual GDP growth rate, India would need to expand its manufacturing value added (MVA) to $837.7 billion and manufacturing gross output (MGO) to $3.8 trillion to join the league of top manufacturing nations such as China, the US, Germany, Japan and Korea. To get there requires investing in various capabilities and products.
Key factors
Most countries specialise 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 the manufacturing and innovation pyramid.
What makes Germany, Japan or the US the new product development hub? They have invested in and accumulated large productive capabilities or advance manufacturing techniques which allows firms to regularly churn out new products of increasing complexity.
A driverless car can take shape only in a country with deep institutional knowledge of precision fabrication, electronics, robotics, design, IT and so on. This cannot happen in Brazil, India or China.
Some priorities
What should our product development priorities be? The central core of manufacturing consists largely of complex metal, machinery and chemical products requiring sophisticated development capabilities. The products are related to each other as their development requires broadly similar core capabilities, making it easier for countries such as Germany or Japan to redeploy the existing capabilities.
While complex products are located in the densely connected central core of world manufacturing, less sophisticated products occupy a less connected peripheral space. They require low skillset (raw materials, agriculture and mining) or specialised capability of use within the same product group (apparel, electronics) only. It is challenging to shift from peripheral products to other products. This explains why East Asia or Africa manufacture only particular types of products.
The capability to manufacture complex products is numerically captured through the Economic Complexity Index (ECI) which ranks countries on the basis of how diversified and complex the manufacturing export basket is. Germany is a top ranker followed by Japan, while India ranks 54 out of 144 countries. Japan and Germany produce high-end products that face less competition in the global market. Countries with low ECI manufacture goods that are commonly produced around the globe.
If India is to become a true manufacturing nation or reach a large scale of manufacturing output, it must develop capabilities in core products and organise large-scale production in peripheral products. This will require targeting four product groups.
Targeted approach
Develop plan to manufacture factory machinery , the machinery that makes the goods. Machine tools have ensured decades of economic prosperity and given birth to a large number of small and large firms. The semiconductor-making equipment (SME) is at the heart of most import products/sectors: computer, mobile, telecom, automobiles, and internet of things. Some of the technology required can be obtained through licences or outright purchase but the most critical comes only from in-house R&D.
Set up advanced manufacturing facilities. Specialty materials, biologics, nanotechnology, precision mechanical devices, integrated circuits, high-end general-purpose chips, embedded systems, processors, medical imaging devices, all fall in this category. Developing capability here would require a leapfrogging mindset, deep commitment, and long-term investments in existing and new R&D institutions 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 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 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 accounts for over 15 per cent of GDP in 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 the mid-1990s, China initially did not choose products that required deep R&D or advance manufacturing. It focused on the electronics and telecom sectors where final products had a modular structure containing a large number of components 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 MNCs to invest in downstream stages of production. Abundant supplies of low-cost labour, 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, items once considered the preserve of developed countries. Despite competition, India is in better position today than China in the 1990s, as the required technology base, expert manpower and the firms that built up the Chinese story are present here.
Create large-scale manufacturing facilities for producing skill and labour-intensive products . China has become the leading exporter of auto components, toys, furniture, footwear, apparels, mattresses, locks, and low-end engineering products by creating the largest possible scale of organised production that ensured economies of scale. India too can employ millions who can move from agriculture or informal sectors to formal jobs.
For experts who prefer a services-driven development path, remember, services account for only 20 per cent of world trade, much of which is tied to products. The rest is all about products and developing still more new products.
(The writer is from the Indian Trade Service. The views are personal.)