Make in India: Who needs another manufacturing powerhouse?
A Zimbabwean friend once explained to me why he preferred the country’s long-time corrupt and tyrannical president to remain in office. He assumed Robert Mugabe had already siphoned off a satisfactory cache of country’s wealth, whereas a newcomer would start a fresh plunder of the coffers.
This is strange analogy, but such a principle roughly applies to China in its role of “factory of the world”. Even if we are critical of China’s reckless, predatory industrial supply build-out, the glut already exists. Do we really want another country to start anew?
Now it might be India’s turn to follow the export-oriented manufacturing development path. Prime Minister Narendra Modi has staked his political life on the “Make in India” campaign, and with some success. Last year the country received more in foreign direct investment flows than China, for the first time. Foxconn plans to hire up to 1 million workers there. Western companies are shifting production there and Indian producers are expanding.
Not only does India seem to have the right demographics for a manufacturing boom, but the global overcapacity in commodities offers an opportunity for India to invest in capital stock on the cheap. And by all means, the country needs better roads, bridges, ports and power infrastructure. And on the margin, more factories. But the next manufacturing powerhouse?
There are two obvious concerns that come to mind. One is that the existing manufacturing supply glut is a deflationary drag on regional and global growth. The other is environmental. As it is, India already has 13 of the world’s 20 most polluted cities.
When China opened to the world for business, it gave producers in the West an opportunity to escape high wage bills, and to enjoy much lower regulatory costs. As the saying goes, the world “outsourced” its pollution to China.
The environmental result is one Beijing regrets, with toxin-saturated soil, cesspools for lakes and rivers, and choking urban smog. China’s environmental enforcement has tightened in recent years, and cleaner and more efficient energy now makes up a bigger part of the mix. As excess capacity is gradually shuttered, the older, more polluting and less efficient factories will be the first to go.
Delhi will have learned some lessons from China’s mistakes, but it seems pie-eyed to assume that India, at a less mature stage of manufacturing development, can afford to invest as deeply in less-polluting energy or industrial facilities as China now can.
The bigger issue is that India may have simply missed the boat on the East Asian investment model. Japan, Korea, Taiwan, then China with its 1.3 billion population all pursued the strategy of high savings and aggressive investment in export-oriented manufacturing.
Even as population growth has waned, technology allows these and other Asian countries to remain huge producers. But where are the customers? The world is awash with highly competitive manufacturing capacity, yet global demand remains tepid.
East Asian development strategies have exacerbated the deflationary and weak demand conditions in the global economy.
China’s entry on to the global manufacturing stage was a two-stage deflationary shock. The first came with disinflation in consumer prices as cheaper Chinese-made goods flooded the world’s markets. Interest rates followed consumer prices down, fueling asset bubbles – from housing in Arizona to cement capacity in Heilongjiang.
The second stage is occurring now, with the overhang of debt deflation. Debt-burdened consumers in the West cannot spend as much on goods. In the East, over-leveraged producers are beset by overcapacity and falling prices. Some are defaulting on loans and laying off workers.
Such conditions illustrate the shortcomings of the East Asian growth model. Which is why a vocal minority argues that India should stick with its alternative, consumption-heavy development model. Instead of seeing cheaply made goods as just a threat, look for the advantage – where, for instance, imports can improve efficiency and combat inflation.
Among those who caution against the “Make in India” campaign is Raghuram Rajan, governor of the Reserve Bank of India. Import substitution policies could backfire. It is better, Rajan argues, to take advantage of others’ mistakes and buy their wares cheaply, while focusing on India’s strengths, such as tech and services. He calls that “Make for India”.
Cathy Holcombe is a Hong Kong-based financial writer