A changed situation

Historically, China is said to have followed a manufacturing-led growth strategy while India chose the services-led growth route. Several factors were responsible for these choices.

Manufacturing industries, especially for exports, need good physical infrastructure like roads, ports, reliable power supply, along with cheap, disciplined labour. China, being a single-party Communist State disallowing any dissent, had an inherent advantage over India with its noisy multi-party democracy, trade unions and law courts making land acquisition, allocation of mineral resources, environmental clearances, labour discipline grounds of contestation, which affect timely completion of projects.

Service industries, especially in IT and ITeS, do not need roads and ports for exports. IT services can be transported over the internet. So, all that the IT firms basically needed were a bunch of state-of-the-art computers, reliable internet facilities and availability of relatively cheap English-conversant computer engineers. Even in cases of erratic power supply, these firms could run with in-house captive power plants. Further, the construction and expansion of IT firms can go up vertically (unlike a steel or an automobile plant), not requiring much land. The small number of unorganised white-collar employees of IT firms were not unionised either. Unlike for manufacturing firms, the Indian government followed a near laissez-faire policy with respect to the newly emerging IT firms.

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All these factors together made India depend mainly on its service industries for industrialisation, exports and job creation (for relatively skilled workers) in the initial post-liberalisation era. The Y2K needs at the turn of the century provided an initial foothold to many Indian IT professionals to work in US and Europe and establish their reputation in foreign markets, which was later capitalised on by Indian IT firms.

But the underlying situation has changed over time. The wage rate in China has been rising as the abundant supply of cheap labour from the Chinese countryside began to dry up. Several countries like Vietnam, Bangladesh, Indonesia, Cambodia offer opportunities for labour-intensive manufacturing in areas where China has gradually lost its cost competitiveness.

Trade relations between China and the US (and its allies) have soured due to the US’ persistent massive trade deficits vis-à-vis China, along with manufacturing job losses, leading to increasing restrictions on imports of Chinese manufactures. Foreign investors seek to diversify their production bases and reduce over-reliance on Chinese inputs and materials. This ‘China-plus’ strategy got an added boost with Covid-related lockdowns/restrictions and disruptions to China-centric international supply chains.

The increasing political and military assertiveness of China and emergence of anti-China strategic blocs (like QUAD and AUKUS) have further intensified the tendency of moving imports and investment away from China by the US and its allies.

These developments have provided new opportunities for relocating some manufacturing industries and foreign investment to countries like India. The Indian government has gone for additional import tariffs and big subsidies in the form of Production-Linked Incentive (PLI) schemes in 14 targeted areas of manufacturing under its ‘Make-in-India’ initiative. Meanwhile, resentment against Indian IT firms and professionals taking away better-paying service jobs from educated Americans and Europeans (the “Bangaloreing” of jobs) also grew for some years and remains a latent presence. As a result, new visa restrictions on Indian IT professionals working in the US and EU come into force periodically. In a sense, India is beginning (by both design and force of circumstances) to gradually move away from its erstwhile services-led growth to manufacturing-led growth strategy.

But questions are now being raised about the scope of this new strategic shift.

First, heightened environmental concerns all over the world, including severe pollution in most big cities in India, will make it difficult for India to go for manufacturing industries on a scale comparable to China.

Second, massive subsidies under the PLI scheme would be a big strain on budgetary resources which have alternative uses. In addition, the scope for capture of these subsidies by special interests is enormous, giving rise to charges of corruption and protracted lawsuits that may vitiate the entire industrial climate of the country, stalling ongoing projects and scaring away potential investors.

Third, unlike large-scale manufacturing units which go to India’s richer states, service industry firms in IT and ITeS can be set up in the poorer states with less developed physical infrastructure. These can also be dispersed to smaller towns (with less pollution) which, in turn, would help achieve better income distribution (regional and inter-personal) outcomes.

Fourth, the massive budgetary resources to be used for PLI subsidy can be better utilised to finance public investment in education and skill development so that many more people from poorer families would be equipped to work in better paying manufacturing and service jobs than working as delivery boys and couriers.

There is a general agreement that India needs to plug into global supply chains of some manufacturing industries. But even here, we need to be careful in selecting the point at which we should enter the value chain. For example, a massive 50% subsidy of $10 billion is proposed to be given to just one Vedanta-Foxconn venture in Gujarat (plus free land, etc.,) for fabrication of silicon wafers (‘fab’) and display glasses for consumer electronics (like cellphones) with a proposed investment of some $20 billion. This is a highly capital intensive and mostly automated plant and hence will create very few jobs per unit of capital invested. Several other major industrial houses are reportedly lining up to utilise such massive subsidies to set up ‘fab’ units in India.

Critics point out that a far better use of these budgetary resources would be to subsidise design and manufacturing/assembling of microchips in India with imported silicon wafers, creating many more jobs for the same amount of investment.

Currently, the US is also bent on reducing dependence on China for semiconductors (under the CHIPS Act) and take chip manufacturing back to the US. We should use this opportunity to work out a strategic partnership (“friend-shoring”) with the US in semiconductors, which are critical components in everything from computers and phones to cars. China is a common geopolitical rival of both the US and India, and also of Taiwan and South Korea -- two other major players in chip design, manufacturing and assembling. So, the US, Taiwan and South Korea are all likely to collaborate if India were to seek to replace China in the global supply chains. Given the abundance of our relatively cheap, skilled engineers and technicians, India presumably would have a comparative advantage in design, assembly and testing of low-end chips, which has a big global market.

(The writer is a former Professor of Economics, IIM, Calcutta, and Cornell University, US.)