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issue: November 2003 APPLIANCE Magazine

New Delhi Report
Can India Be A Manufacturing Hub?


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by Adite Chatterjee, New Delhi correspondent, APPLIANCE magazine

A series of articles in the Western and Indian media have been debating the merits of two economic rivals, China and India. Not so long ago, India's economic achievements were considered no match for that of China.

However, the tide seems to be turning in India's favor now, and many are convinced that India could well give China a run for its money, especially in the manufacturing sector.

Can India become a manufacturing hub for multinationals? Not many people would have thought so, as the reasons attributed for India's non-competitiveness in the manufacturing sector included poor infrastructure, high-tax levels, a high cost of capital, a small-scale industry reservation policy, and low-labor productivity. However, the most recent HSBC Asian Economic Insight report states, "Many of these factors have improved, leading to increased competency in manufacturing."

For example, a CII McKinsey study that compared labor productivity levels of India and China has found that China' s productivity level is 2.8 times that of India's, with manufacturing sector productivity is 5.5 times. The HSBC report also says that "sectors such as electronics, computer services, and automobiles that have enjoyed higher foreign direct investment, have higher labor productivity due to the import of global best practices. These are also the sectors that are improving their exports at the expense of traditional sectors such as textiles." In fact, the report points out that the labor productivity differential is lowest in the production of television sets, a sector that has a large number of global brands.

Both the HSBC report and the CII-McKinsey study point out that India's productivity is higher in sectors such as automobiles, telecommunications, and software, areas that traditionally have attracted a greater amount of foreign direct investment.

Significant progress has been made in other areas as well that has improved India's potential as a manufacturing hub. For example:

  • The high cost of power and delays in road and port transportation have always weighed heavily against India. But increasingly these deficiencies are being eliminated. India has several projects to improve its infrastructure. The largest road networking project, the National Highway Development Programme, is currently in the process of linking important cities with four -lane highways and expressways. With a total expenditure of an estimated Rs 580 billion (U.S. $12 billion), the project will cover a total of 14,000 km.

  • Telecom costs have been reduced significantly since the New Telecom Policy was established in 1999.

  • The country's New Electricity Bill has paved the way for increased participation of the private sector in the power sector

  • Improvements in tax and tariffs are another positive factor. The Indian government is committed to reducing the peak rate of import duty each year to bring it in line with East Asian levels.

    India, it seems, has been working hard to get its act together to compete with China. But a combination of factors-including a quantum jump in foreign direct investment-still needs to be put in place for India to reach its ambition of becoming a global manufacturing hub.

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