India can beat China by beating them in Manufacturing

India China border face-off has resulted in protests across the country. People are angry and justifiably so. People across the country are showing their anger in various forms, by uninstalling the Chinese Apps such as Tik Tok, by calling for a ban on the Chinese products, by boycotting the Chinese products. Therefore, let’s look at the impact of such calls of ban or boycott on the Chinese economy as well as on the Indian economy.

• Impact of India’s ban or boycott of the Chinese goods on the Chinese economy:

China is a large economy. As per world bank data, the Chinese economy is the second-largest economy in the world with a nominal GDP of 13.608 trillion US$ in 2018 (measured in Current US$). China is also a manufacturing superpower with a manufacturing output of 4.003 trillion US$ in 2018 (Current US$). What does it mean? It means manufacturing contributes approximately 29.42% (4.003/13.608) to the Chinese economy.

Let’s also consider the global manufacturing output in the same period. In 2018, the global manufacturing output was 14.17 trillion US$ (Current US$). Chinese manufacturing output was 28.25% (4.003/14.17) of the total global manufacturing output. That’s humongous. The USA is second in this list, but far behind China.

Now, let’s dig deeper. China mainly exports a variety of manufactured goods to countries across the world. As per the world bank data again, the Chinese exports contributed 19.51% to the Chinese economy in 2018. What does it mean? It means China exported approximately 19.51% x 13.608 = 2.655 trillion US$ worth of manufactured goods. Now, 2.655 trillion US$ worth of manufactured goods is a huge number. No country in the world exports such a large volume of goods.

Now, let’s come back to India. India China bilateral trade in 2018 was 95.7 billion US$. China exported approximately 76.87 billion US$ worth of goods to India in 2018. India exported approximately 18.83 billion US$ worth of goods to China in 2018. Therefore, in 2018, India’s trade deficit with China was 58.04 billion US$.

Now, let us suppose, Indians completely boycott the Chinese goods. Therefore, China will take a hit of 76.87 billion US$. China’s total exports will fall from 2.655 trillion US$ to 2.578 trillion US$. This will surely have an impact on the Chinese exports and Chinese manufacturing sector along with some allied industries such as logistics. But think hard, will this fall from 2.655 trillion US$ to 2.578 trillion US$ really derail the Chinese economy? The answer is No.

• Now, let’s assess the Impact of India’s ban or boycott of the Chinese goods on the Indian economy:

Again, going back to the world bank data, we find that India’s nominal GDP in 2018 was 2.719 trillion US$ (Current US$). And India’s manufacturing output in 2018 was 403.05 billion US$. What does it mean? India’s nominal GDP was 1/5 (2.719/13.608) of China’s GDP in 2018. And despite the launch of the Make in India campaign in 2014, India’s manufacturing output was still 1/10 (403.05/4003) of China’s manufacturing output in 2018.

Indian exports were 19.74% of India’s GDP in 2018. In other words, 19.74% x 2.719 trillion US$ = 536.73 billion US$. Out of these 536.73 billion US$, India exported 18.83 billion US$ of goods (mainly raw material) to China. Therefore, if the bilateral trade stops completely between the two nations, then, Indian exports would be 536.73 - 18.83 = 517.17 billion US$. This fall in exports won’t derail the Indian economy either.

However, the Indian companies that sell products domestically, as well as export goods worldwide, may take a hit. How? These companies depend on Chinese suppliers for various parts. India imports a variety of manufactured goods from China. Some of them are components for automobiles and smartphones, telecom machinery and equipment, APIs for the Pharma sector, other Chemicals, plastic & other metallic goods, machinery & tools for the construction sector.

All these sectors are India’s sunshine sectors. These sectors have not only created millions of jobs in India but also have contributed to the Make in India initiative. Take the case of an Auto company from Pune. The company exported nearly Rs 15000 Crores worth of products across the world. The company and its component suppliers sourced some parts from China worth Rs 1000 Crores. If we boycott or ban the Chinese products, won’t it have a negative impact on this large Indian Automaker? Take the case of the Pharma sector. India’s pharma industry is the third-largest pharma industry in the world. India pharma industry imports approximately 65% of APIs (Active Pharmaceutical Ingredient) from China. There are cases after cases of many Indian sectors being dependent on China. Any disruption will result in shortages and there will be a negative impact on various Indian sectors. Do we want that? Do we want to hurt our businesses? I guess, No.

• Therefore, what’s the way out? How can India teach a lesson to China?

It is possible by becoming a manufacturing hub.

"However, manufacturing is a hard and long game and India can’t become a manufacturing hub in a year or two".

It takes 8-10 years of constant policy support as well as capital along with infrastructure development. India needs to prepare for it now. Therefore, Instead of calling for a ban or boycott of the Chinese products, what we as people of India need to do is urge or put pressure on the government of the day to formulate manufacturing friendly policies in the country. Let the Chinese products come into India. However, side by side, we continue to develop our manufacturing sector and give a much-needed boost to the Make in India program.

For decades, we have been hearing about the need to grow the manufacturing sector. However, as things stand today, our manufacturing sector has not taken off. There is no point blaming this government or that government for the lackluster performance of the manufacturing sector in India. Make in India program was also launched to address the lackluster performance of the manufacturing sector. But things have not taken off. Involving talented manufacturing entrepreneurs in the policymaking roles will certainly help India in becoming a manufacturing powerhouse. Bureaucrats and economists can’t understand the technicalities and nuances of the manufacturing sector. Therefore, the government of the day must involve manufacturing entrepreneurs in the formal policymaking role.

We can’t beat China in the short term. If we try to ban or boycott the Chinese products, then, we will actually end up harming ourselves. However, we can beat China in the long-term by beating them in the manufacturing space. It’s a long game. But it must begin now.

Is Make in India a success?

Prime Minister Modi recently highlighted the importance of ‘self-reliance’ or 'atmanirbhar bharat abhiyan'. He further stressed that the Coronavirus pandemic forces us to become ‘self-reliant’ or 'atmanirbhar'. These words could not have been more true for India’s manufacturing sector, and Make in India program in particular. It is the right time for India to become self-reliant for manufactured products. Will his government act and develop the necessary manufacturing infrastructure in order for India to become self-reliant in the manufacturing sector? Can we boost our manufacturing output from the current 403 billion US$ to 2 trillion US$ in the next decade? It’s a long and arduous journey, but the journey must start now.

As per the world bank data, India’s manufacturing output in 2018 was 403.05 billion US$ (current US$). Whereas China’s manufacturing output in 2018 was 4.003 trillion US$ (current US$). In other words, China’s manufacturing output is nearly 10 times the size of the Indian manufacturing output. With nearly identical population size, India can not afford to be lagging behind in the manufacturing sector.

It is very well established that construction, infrastructure, and manufacturing sectors are the biggest employment generators in any given economy.

The construction sector is a cyclical sector and is currently at its nadir with many stuck projects and consumer confidence at an all-time low. The infrastructure sector has its own challenges pertaining to land and capital. Therefore, focus on the manufacturing sector or enhanced focus on the Make in India initiative at this stage of time will not only give a boost to India’s GDP growth rate but will also generate formal employment at a massive scale besides making India self-reliant. The timing is crucial because of the following 2 reasons:

1. Wages are rising in China since 2006 and therefore companies across the world are looking to develop supply chains in other low-income countries. As we all understand, Production is directly proportional to capital and labor, therefore, there is a massive opportunity for shifting supply chains to countries where labor rates are relatively low.
2. Coronavirus pandemic can be a trigger point for companies across the world to look for an alternative other than China.

However, it will be a herculean task for other low-income countries including India to tap into this opportunity because of the lack of Preparedness. Therefore, the question that arises is how can India prepare itself to tap into this opportunity? This is possible by developing the manufacturing infrastructure in the country. Only manufacturing entrepreneurs understand the various elements of the manufacturing infrastructure which is completely different from the physical infrastructure such as electricity, roads, ports, railways, etc.

Before focusing on the need to develop the manufacturing infrastructure, we as a society need to distinguish between the ‘top-down manufacturing approach’ and the ‘bottom-up manufacturing approach’.

In a top-down manufacturing approach, a large company (domestic or multinational) sets up a plant and then ancillary units come up to supply different parts to this large company. India’s auto sector is an example of the top-down manufacturing approach. This approach is also known as capital intensive manufacturing. Robots and hi-tech machinery are deployed to manufacture products. Therefore, employment generation in this kind of manufacturing approach is limited.

On the other hand, in a bottom-up manufacturing approach, an entrepreneur comes up with an idea to manufacture a product. This idea could be about anything such as toys, electrical items, souvenirs, electronic items, common household goods, etc. However, an Indian entrepreneur does not manufacture these goods in India and instead source these goods from China. No wonder, our trade deficit with China is rising year after year. Why can’t an Indian entrepreneur manufacture these goods in India itself? The answer lies in the lack of manufacturing infrastructure that we just talked about.

Without proper manufacturing infrastructure in place, it becomes difficult for an entrepreneur to manufacture simple common household goods in India itself. So, what are the elements of the manufacturing infrastructure that India needs to develop in order to tap into this big manufacturing opportunity? Here is a list based on the ground experience of entrepreneurs working in the manufacturing sector in India:

1. Involvement of startup entrepreneurs in the policymaking process for the manufacturing sector
2. Development of the tool-room technologies across India
3. Development of the concept of ‘manufacturing society’ to grant approvals at a faster rate and to achieve economies of scale
4. Financial support to manufacturing entrepreneurs
5. Enhanced focus on the technical skill development programs across India

The above 5 elements form the nucleus of the manufacturing infrastructure. Each and every single element is a study in itself and therefore it is beyond the scope of this article to explain these 5 elements in detail. With the manufacturing infrastructure in place, an Indian entrepreneur will be encouraged to manufacture goods in India itself rather than trading the same goods from China. India’s trade deficit with China is in excess of 60 billion US$. In other words, nearly 2% of India’s GDP. The manufacturing of these goods within India itself will propel India’s yearly GDP growth rate by 2%. Moreover, Indian entrepreneurs after having tasted success at home will be much more confident to export globally-competitive goods to the USA, Europe, Latin American markets.

Additionally, with this manufacturing infrastructure in place, companies across the world will be encouraged to shift supply chains to India thereby further boosting the Make in India program. The bottom line is, ‘we as a society will be competing on our strengths rather than the extraneous factors originating in China’.