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Manufacturing: Unmissed opportunity

LiveMint logoLiveMint 12-05-2014 V. Anantha Nageswaran

In a blog post published in Financial Times on 6 May, James Crabtree wondered if India had missed the opportunity to create jobs although the Bharatiya Janata Party’s (BJP’s) prime ministerial candidate has often spoken of the need to create jobs. Crabtree wondered if all the manufacturing that migrated out of China had already found alternate homes in Vietnam or Myanmar. Economist Arvind Panagariya has called the pessimism on India missing the boat nonsense. I agree with him.

The revival of manufacturing and creation of jobs is not a static one-off exercise. Companies are looking for competitive places to invest in new manufacturing plants, projects or for expansion. Even if the original investment takes place in one country, another country could be the location for further capacity addition.

Recently, I was in Vietnam for a visit to write a country report for a client. The raw energy that one finds on the streets of India is palpably evident there too. People want to move ahead, given small openings, and nowhere is it more evident than in the streets of Ho Chi Minh City and Hanoi. Road users and traffic lights function independent of each other. However, has Vietnam become the refuge for all outsourced manufacturing that used to find a home in China? The answer is no. Clearly, Vietnam is a strong contender not the least because of the logistical advantage of moving from China to Vietnam rather than from China to India. Korean smartphone producers and Intel have set up factories in and around Hanoi. Foreign direct investment in manufacturing remains the one bright spot in Vietnam’s economic landscape that still remains marred by the massive credit boom and bust that the country has undergone since 2007.

But, not all manufacturers are moving to Vietnam at the expense of China. Nike is an example. It has substantially increased its production in Vietnam but at the expense of its production in Southeast Asian nations. In other words, there is still scope to attract manufacturing investment that would look to leave China in the years ahead. Some of the manufacturing being set up in Vietnam—whether it is by foreigners or by domestic producers—are due to the belief that Vietnam would be a big beneficiary of the Trans-Pacific Partnership (TPP) agreement that the US is trying to forge with nations all the way from Chile to Vietnam. Vietnam’s exports to the US, for instance, would not attract duties and that would give Vietnam a price advantage that would be denied to China’s exports since China is not part of TPP. But, TPP is far from being agreed upon. It has been repeatedly delayed. The US’ ambitious agenda to include everything from goods to services is one reason. Some countries are rightfully weary of losing sovereignty on matters such as financial services.

In any case, regardless of TPP, India’s cost advantage over Vietnam is quite strong. For example, in a report published in 2011, Accenture had shown a chart of average wages in several countries in Asia—China, Indonesia, India and Vietnam. Indian labour costs are the cheapest of the four countries compared. Then, in a report that Mckinsey Global Institute published in February 2012 on sustaining Vietnam’s growth, the proportion of firms surveyed that claimed difficulty in hiring skilled engineers and managers was far higher in Thailand, Vietnam, Singapore, Malaysia and Philippines than in India. In the Global CEO Survey of 2013 published by Deloitte, executives believed India would move up from fourth to second place in five years in terms of competitiveness.

To be sure, India scores poorly in terms of number of researchers per million population, innovation index and quality of life. Yet, the executives were sure that India would climb to the second place in terms of competitiveness. They expect India to fix these problems and if these problems are fixed, there is no reason why India’s manufacturing competitiveness could not improve.

Graphic: Ahmed Raza Khan/MintFinally, notwithstanding the Indian banking system’s current bad debt problem, Indian credit overhang is far lower than that of either China or Vietnam. The non-financial private sector debt to gross domestic product (GDP) ratio in India is about 57%. In China, it is 181% (see chart). China’s public debt is estimated at 53%. In India, public debt is around 70%. Hence, China’s total debt burden is around 230%. India’s is little more than half of that. Vietnam too has a crushing debt burden because its bank credit stock (relative to its GDP) is much higher than that of India. Deleveraging has barely gotten underway in China and it has still some ways to go in Vietnam.

In short, India has not missed the bus. It has not made any serious attempt at reviving manufacturing sustainably in the last decade. That is why the job-creation record of the Indian economy in the last 10 years has been dismal. It is possible to reverse it. There are still many low-hanging fruits. The manufacturing bus is still waiting for India to climb aboard.

V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution. Comments are welcome at baretalk@livemint.com.

To read V. Anantha Nageswaran’s previous columns, go to www.livemint.com/baretalk

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