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India Needs Manufacturing

Compare India and China – China's manufacturing accounts for over half of national GDP, India only 16%.  India's advantage is its service sector, especially IT industry, but it is also its disadvantage, as IT industry is capital-intensive, the opposite of what India is rich for.  The service sector's contribution to the country's employment is just 12%. 

Both China and India are labor-intensive. Plus, India is forecast to have much bigger labor supply than China in coming years. Indian government needs to change its current rigid labor laws and regulations to encourage development of its own manufacturing industry.  This will simultaneously achieve diversification of its IT-specialized economic structure, and create more employment opportunities for the common poor.

Economist Magazine's report on India's "Himalayas of Hiring" in manufacturing:

LABOUR is cheap in India: signage is painted by hand; bricks are piled nine-high on the crowns of construction workers; shops are more crowded with attendants than customers. As China’s workforce becomes older, costlier and stroppier, some firms will look to exit the dragon. Only India has the numbers to match it.

According to the International Labour Organisation, the number of Indians in the workforce will increase by almost 80m over the next decade. But that is an understatement, argues a new paper* by Tushar Poddar of Goldman Sachs and Pragyan Deb, now at the London School of Economics (LSE). Only a third of Indian women currently seek paid work, they point out (other estimates are even lower). If that figure rises to 38% by 2020, then the Indian workforce will swell by 110m, they reckon. Three out of every ten extra workers in the world will be Indian.

India’s renowned services sector will employ about 45m of them, the authors forecast. But 40m will have to find work in industry. Overshadowed by India’s digital dynamos, India’s widget-makers are no slouches. Manufacturing grew at a perky 8% annual rate over the past decade and in the last fiscal year contributed a greater share (16.1%) of India’s GDP than agriculture for the first time in the country’s history. But its contribution to employment is less impressive: just 12%.

Unfortunately, India’s manufacturers economise on labour, despite its abundance, favouring capital or technology instead. … in industries such as clothing, jewellery and toymaking, the ratio of labour to capital halved over the 1990s…The regiments of assembly-line workers characteristic of China’s industrial revolution are harder to find in India. Several scholars have identified a “missing middle” in Indian manufacturing: workers cluster either in minuscule factories or large and sophisticated ones (see right-hand chart).

What is deterring Indian manufacturers from hiring more people? Messrs Poddar and Deb name India’s “archaic labour laws” as the “biggest challenge” among many to industrial growth. According to India’s employers’ association, the central government imposes over 55 labour laws and the states another 150 or more. The most notorious is the Industrial Disputes Act, which requires any establishment employing 100 or more workers to ask the state’s permission before firing anyone.

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