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Manufacturing is so poor that it is difficult for India's economy to catch up with China
When Indian Prime Minister Narendra Modi pondered his “New Year’s resolutions”, one goal stood out: redouble efforts to make India a world manufacturing hub comparable to China. Few goals are more important to India's future. But there are probably few goals that are more difficult to achieve than this. The fragility of Indian manufacturing can be seen from the data. Manufacturing accounts for only 15% of the country's gross domestic product (GDP), less than half that of China. No poor Asian country has advanced to the middle-income status with such weak data. So, Modi's 'Make in India' initiative, announced to great fanfare in September 2014, seems urgent. India has advantages in certain high-tech manufacturing industries. Ford, Hyundai, and many others operate some of the world's most advanced factories in the country, filled with robots. Many multinational automakers see India as an important export base. But India's inferiority in low-skilled, labor-intensive industries such as clothing and electronics raises concerns, as it must create 12 million new jobs a year by 2030 to meet its impending population Job demand brought about by the surge. The case of Nokia exemplifies these difficulties in India. Until last year, the Finnish tech group operated a large, very modern factory in Chennai, employing around 8,000 workers and exporting products around the world. A local supply chain has been built around the factory, attracting companies such as Chinese smartphone maker Foxconn. But all of this happened before the Indian tax authorities had their eyes on the business. Two controversial tax demands have thwarted plans to hand over the plant to Microsoft as part of a global acquisition. Today, the factory will be sold or closed, putting both workers and suppliers at risk. To make matters worse, other phone makers are unlikely to do what Nokia did in the future, lest they repeat the same mistakes. Despite the sharp rise in domestic demand, local producers such as Micromax rely almost entirely on Chinese suppliers. China's Xiaomi, which plans to grow in India, plans to set up a research and development lab in Bangalore, but production won't begin there until at least 2016. Labor-intensive products such as mobile phones should be an ideal choice as India seeks success in manufacturing. However, industry groups have warned that India's mobile phone exports could drop to zero next year. Reversing this trend will be difficult, making the limited progress of Modi's otherwise laudable 'Make in India' programme all the more frustrating. The 'Made in India' phrase has become the catchphrase of flattering business people, but it has done little to drive policy change. “At the end of the day, more is said and less is done,” a former minister from Modi’s party lamented last month. Economist Arvind? Arvind Panagariya (Arvind Panagariya) said that this lack of concrete measures is indeed disappointing, but export-oriented manufacturing remains the best hope for the Indian economy. He argues that the 'Make in India' program should be seen as a reason for the need for broad reforms in India, such as scrapping outdated labor and land acquisition regulations. This is very reasonable, but also sobering. It shows that India's manufacturing ambitions will require painstaking, if not impossible, changes in all sectors of the economy. To make matters worse, the changing nature of manufacturing in Asia is making India's task even more difficult. Cheap labor remains an advantage, but factors such as logistics and energy costs are becoming increasingly important in attracting multinationals to relocate production, two of which India does not have the upper hand. Even though manufacturers operating in China are under pressure from rising wages, there is no sign of a large number of manufacturers moving to India. Then, demand is also an issue. 'Overall, the world is unlikely to accommodate another export-oriented country like China,' said Reserve Bank of India Governor Raghuram? Raghuram Rajan said so this month when he warned of a tacit tipping of individual industries on tariffs under the guise of pro-manufacturing. This is not to say that progress cannot be made in India. A recent report by the Boston Consulting Group (BCG) ranked the manufacturing costs of 25 top exporting countries, with India in second place after Indonesia. Indian manufacturing faces myriad hurdles, but that, in turn, suggests that India has the potential to remove at least some of those costs, for example by overhauling the tax system that overwhelmed the Nokia factory. However, India is unlikely to succeed in establishing itself as a Chinese-style export powerhouse. But if we can walk a certain distance on this road, it can also play a key role in promoting the development of India. As Modi ponders his priorities for 2015, he may be thinking that it is better to do part of the plan than not to try at all.