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  India and China - Two Primary Manufacturers for the World Markets  
 

 

By: Hari Sud
June 17, 2006
V
iews expressed here are author’s own and not of this website. Full disclaimer is at the bottom.

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It is true that the West is shopping for a nation with skilled, educated and plentiful manpower to satisfy its manufacturing appetite in next 10 to 20 years. Past twenty years, China has dominated consumer goods manufacturing for the West. Next twenty are to be dominated by India and China, with India getting the bigger slice. From business point of view, it is suicidal to have one supplier, one manufacturer or one foreign nation to supply most of your manufactured products. It is not a good business practice. Corporations in their home countries always discourage it. What if, a catastrophe strikes the supplier nation? What if, war in the neighborhood prevents supplies from getting thru? What if, policies change and the two nations pick up a fight, preventing orderly conduct of commerce? All these do not speak well of one nation monopoly over the supply chain. Well, the West has made that mistake. China domination of their supply chain has to end. It is after 20 years and over $700 Billion investment later, they have concluded that an alternative-manufacturing place is to be developed. The forgoing will keep China’s future ambitions in check. An alternative will be found. The choice is now falling on India. The latter, has equally smart & well-versed labor force, well-established BPO & IT base and has strong legal & financial institutions. All these benefits put India ahead of China. To top it all, Indians speak and write English as well as the West does, hence choice of India is a foregone conclusion. President Clinton reached these conclusions during his last two years in the Office; hence he started to smile at India. This followed long roundtables with US in Talbot-Jaswant discussions (very similar to Kissinger-Chou discussions) to hammer out political and ideological differences. The net outcome of these discussions was that US started to appreciate India’s position on economic, military and world affairs. From India point of view, India needed money, and lots of it, to reach 10% growth target. West was willing to invest, provided both sides showed some movement away from the previously held political and ideological positions. Indian masses also understood these realities and elected right wing government's) in last eight years with one goal – achieve high economic growth. US initially moved slow but sure footed, with Clinton visit to India in 2000 and subsequent removal of host of restrictions on India. The final movement on both sides witnessed the historic Indo-US Nuclear deal in March of 2006. In past five years, more and more investment has started to pour in, which has lifted Indian economy from measly 5% growth to 8% (9.3% last quarter). Still investment on the scale being made in China is needed. The aforementioned deal is a signal to the private investors that things have changed in Indo-US relations. This has also followed with Western media’s change of heart. They started to admire India’s progress. Now the die is cast for India to receive huge investments and become the primary source of manufactured goods for the world.

Why did it Took so long and what was the Hold-up?

India’s past as a nation, is not very admirable. India tied up with the Soviets and lost heavily. Chinese jettisoned the Soviets in 1971 and were big gainers. US favored Chinese as opposed to the Indians, in-spite of Chinese having killed 29,000 US servicemen in Korea. These memories were still fresh in the minds of Americans, when Henry Kissinger was making deals with Mao Tse Tung & Chou En Lai. When financial & political deal was struck in Peking in 1973, American businesses welcomed it. China’s gains started in 1982. It took roughly ten years from 1973 to 1982 and lots of American advice to make all the structural and financial changes to their system before money came pouring in into China. I would imagine similar or lesser time needed to make all the structural changes in India before money comes pouring in a big way. In past three years India has taken lesser harder attitude towards US (e.g. Afghanistan, Iraq, Iran). In return US have made three important changes into its thinking process. First the political discussions of 1999-2000 although inconclusive have set the stage for better future relationship management between US and India. Second, a signal to the private investor has been given to begin investment activities. The latter has resulted in study-increased flow of capital into India. Third and most important is the Indo-US nuclear deal. It is an effort to place India at par with China without actually naming it. Come to think of it, these were the exact sequence of events in China-US rapprochement. First came the Kessinger secret negotiations, second was President Nixon visit (first ever for a US President) and third was the agreement for the free flow of money to and from China. Later China got its most coveted seat in UN Security Council.

With all the above is happening in public glare in India and US. Stage is set for big things to happen in next 10 to 20 years.

How Much Money India needs and where is this Money to be spent?

First and foremost, capital expenditure is needed to upgrade the infrastructure. Indian leaders have estimated this need to be about $150 Billion over 10 years. Indo-US nuclear deal is part of this effort. Only recently the GE Chairman on his visit to India was upbeat on Indian market potential. He has sensed a huge potential for GE products for the infrastructure upgrade. Thanks to him and people like him who are visiting India and taking back home a very positive outlook. This is very different from business executives who visited India five years back. As the infrastructure upgraded is begun, relocation of industry to India will begin concurrently. It is a duplicate of what happened in China from 1982 to 2005. The difference is that China has the consumer goods manufacturing monopoly; India is set to welcome high value, urgently needed, strategic items. Auto parts, heavy machinery manufacture, machine tools, petrol refining, textile machinery manufacture, and shipbuilding, electronic hardware manufacture etc. is in this category, to be relocated to India.

The West needs to invest about $800 Billion to a Trillion dollar into India over next 20 years. All this will be privately funded. This is over and above $140 Billion needed to fix and upgrade the infrastructure. All these monies will be paid back from the export earnings. Low labor cost, high-end computer skills and availability of raw materials will play a key role in this large-scale development. Hence if $55 Billion a year (same amount as invested in China last year) is invested in India for the next 20 years, then the economy will quadruple from $800 Billion today to $3.5 Trillion in 2025. India will catch, China’s 15 years head start by 2020 or sooner. This optimism has a reason, whereas Chinese manufacture low value, lower end consumer products, India will concentrate on high end, high margin products. The latter fact is well borne by the Indian IT and BPO services exports. Margin in IT & BPO services is three times more than the consumer goods products exports from China. With these developments, Indian per capita income will also quadruple. Poverty will be vanished permanently. Just like China today, India will be the envy of the world in fifteen years.

The West should stay assured that India not only wishes to be a merchant manufacturer of products and services, but be also a very large consumer. One billion people consume a lot of products. Hence high return on their investment is guaranteed.

What are the Chances of above Happening?

The question more being asked now is not if it happens, the question is how soon it will happen? The impressive 9.3% growth in last quarter set the ball rolling in business boardrooms in the West. The Economist. COM and International Herald Tribune both had cover stories. The former in its natural self had an impressive lead story, although the contents are a bit questionable. India today is on every corporate do list. Major US, British and other funds investors have drawn up plans to enter India’s financial market. Last few months have shown all the positive signs. First the economy recoded growth far beyond even the Indian economists imagination. Then the Monsoons which were predicted to be deficient this year came out roaring from the Arabian Sea and Bay of Bengal to make up the deficiencies of the past two years and last and not the least there are signs that US Congress, after a lot of dithering will sign-on to the Indo-US Nuclear deal. All the forgoing is building confidence in the West’s mind that, not only India is trustworthy as a new manufacturing partner but also as a strategic partner.

All the needed trillion dollars or so investment may not come pouring in like a Tsunami but money will be raining cats and dogs. The country’s capability to absorb the investment will also play an important role. Overheated economy may result in a collapse, which means that all investment is to be red carpeted at a digestible rate. This digestion is to be well managed with progressive increase as new techniques and new tricks to manage it well are learnt.

Hence, with the present trend, it would appear that the chances of above happening are better than ever before.

Let us get on with the Needed Structural Reforms

Reforms; Reforms; Reforms, should be the key slogan of any government which is elected in next 20 years. The present UPA government has done well. It has kept up the momentum of economic development set by the previous NDA government. Both can share the laurels for this success. Both governments are/were hampered by their political partners in these reforms. Like it not, some of the following actions are overdue. Let us get on with them. This opportunity of Foreign Direct Investment (FDI) if missed, because we could not get our house in order will not come back in a millennium or so. One thing is certain, US & Europe want two nation suppliers, if India balks, they will go elsewhere. Let us not let them down and make them consider another place. Let us give them whatever they want. Mind it, the Western multinationals and investors are not dishonest. They are plain simple businessmen, doing their best to maximize profits and protect their investments. India will do the same when India has money to spare and is ready to invest it abroad. Hence all those battle cries of the past about bad world of multinationals are to be dumped. Indian leftists have to understand the forgoing. Look how China succeeded by befriending the West. I repeat again India has to do the same. These outstanding reforms are to be taken up pronto.

• Labor laws

• De-regulation

• Privatization

• FDI & Insurance

• Many more

Easing of the labor laws is paramount to any major shift of manufacturing from West to India. The left legislatures are not leaning from the Chinese experience. If they persist in their attitude, they may have to be bypassed and help sought from opposition NDA to pass the necessary legislation. De-regulation in a few industrial sectors is far over due. The privatization, which had gathered some steam under NDA government, has been completely side tracked. So is the relaxing of FDI rules in important sectors of retail trade and other areas. Anybody who has shopped in New Delhi & Mumbai, knows that how chaotic is shopping experience and how money is fleeced by mom & pop storeowners in the name of variety and convenience. It is substandard and pricey goods they are selling. What they need is competition from the super stores. It will improve quality and kill the craze for illegal imported goods. All political lobbies connected to these delays are to be re-educated. Previous experiences of 50 years are to be un-learned in favor bigger and better things.

My point is that China admiration in the West has declined one notch. May it be due to their militaristic ambitions or their strategic foray in Indian Ocean or simply threatening Taiwan, Japan or Vietnam with force or under pricing their currency to gain advantage in the market place? It is making the West a bit uneasy. India came out from behind and put up a very competent manufacturer’s image with economy posting 8-9% growth. In addition the current government, although handicapped by its leftist partners has maintained a very business like image. This is being admired everywhere. Unfriendly Western media has suddenly turned around. A new very positive image is in the making. Nay Sayers will always be around. Fortunately the admirers are overwhelming them. Let us not throw this opportunity away. Let us get our house in order. Let us get on with the economic reforms. Failing that, it is likely that the Western investor take its dog and pony show elsewhere. That is not good for India.

Hari Sud

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