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Why India Cannot Compete With China in Manufacturing for the World

A number of my relatives run manufacturing plants in Tamil Nadu - a relatively developed state. My in-laws have also recently started importing from China [replacing their Indian suppliers] and I will tell you why costs are higher than in China.

Power availability: You start a plant and realize that power availability is not 24/7. In Coimbatore and other industrial places you get power for like eight hours a day. That means the machinery lies idle for sixteen hours and that wasted capacity adds to the cost.

Cost of power: In India, we subsidize the power to farmers so much [farmers are a huge political base to regional parties] that the electricity companies either have to go bankrupt or charge huge amounts for industries. Electricity cost is often higher than some developed countries.

Cost of labor: Getting good factory labor in places like Tamil Nadu has become extremely hard. Skilled people are already in high paying industries. The unskilled ones are hard to deal with. When we get labor from the north, they often move out without much notice [go to Diwali on vacation and never return]. Skill building is lacking. If you pay $250, the quality of labor you get in China is likely higher than what you get in India.

Cost of transportation: Given the poor roads, a shipment from India's north can take a week or more to reach India's south. Sometimes it is quicker and cheaper to actually get a shipment from Shenzhen than Kolkata. Time is money and all those delays add to your cost. If I could get something in two days, I could sell it immediately rather than wait two months to sell it [add up the interest costs].

Bureaucracy: Starting a new plant or to adding anything to an existing one is very costly in time and money. You need to fill out a huge number of forms and grease a lot of palms just to do something legal and useful. Shipping across states is also very delayed [this is why the industry is pushing for GST]. Unless most of the Indian laws - especially the one dealing with factories and labor - are thrown out, corruption, delays and inefficiencies will remain.

Anti-large enterprises: India grew up in the mindset that large industries are bad. While many laws have changed since 1991, some of our laws, especially in textiles, are structured around small enterprises. Small businesses do not have the scale to produce cheaply and take on massive factories in China or Bangladesh. Thus, in the huge lucrative market of ready-made garments, Bangladesh quickly took the number two spot - leading to huge improvements in women development, while Indians are clinging to outdated laws favoring small, cottage industries.

If India has to compete with China, we have to completely overhaul all of the economic laws - taxes, labor, factories - we have had in place since 1947. Otherwise we will continue to be costlier than Vietnam and Bangladesh.

(Above is by Balaji Viswanathan, CEO of Invento Robotics)

Delhi has never enjoyed the economies of scale that its giant neighbour benefits from. Policies on land and labour and its dysfunctional infrastructure are also among the reasons why it has been unable to take advantage of the tensions between the US and China to attract multinationals seeking to shift production away from the mainland, analysts say.

India has a combined trade deficit with its neighbours in south-east Asia of almost $22bn. In the first 10 months of the year the value of its exports shrank 4.9 per cent, while Vietnam experienced a 23 per cent increase, and Taiwan was up 2.3 per cent.

“A weak manufacturing sector is making India more protectionist in terms of global trade,” said Shumita Deveshwar, a Delhi-based analyst with research boutique TS Lombard.

The lack of export competitiveness is one reason why the country’s growth is languishing — economists polled by Reuters expect that data published later this week will show Indian economic growth has fallen to 4.7 per cent, the first time in six years that it has been less than 5 per cent.

And local consumers are not coming to the rescue. Private consumption growth is slowing, reaching a five-year low of 3.1 per cent in the third quarter, largely accounting for the ailing economy, according to Sajjid Chinoy and Toshi Jain of JPMorgan in Mumbai.

This is partly because Indian companies’ poor cost control has consequences for the domestic market too. Take the automotive industry, which contributes 7.5 per cent of the country’s gross domestic product and employs more than 30m people directly and indirectly.

Given India’s high duties on car imports, “the only way to sell cars in India is to make them here”, said Rajeev Gupta, founder of Arpwood, a merchant bank based in Mumbai. “Every part of the value chain is Indian. But India is among the highest cost producers in the world; it isn’t cost competitive.”

Maintaining high import tariffs and backing away from trade deals all fuel India’s dependence on protectionism. But this is not the right formula for global competitiveness at a time of slowing growth.

India’s latest move to insulate its market from foreign rivals makes it hard to see how the country’s industrialists will ever have an incentive to improve.

(Above is from FT)

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Why India Cannot Compete With China in Manufacturing for the World
Why India Cannot Compete With China in Manufacturing for the World

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