India’s factory future

China’s President Xi Jinping played to stereotype when he described his country as the world’s factory and India as the world’s back office in an op-ed article heralding his arrival in the latter yesterday. How ironic then that Xi’s first port of call wasn’t Bangalore, the heart of India’s outsourcing industry. It was instead Ahmedabad - the largest city in Gujarat state, which can justifiably lay claim to being India’s factory.

Consider the numbers. In China, industry contributes 44 percent to gross domestic product, compared with only 26 percent in India. By contrast, services add 57 percent to GDP in India, versus only 46 percent in China. (The difference is made up by agriculture.) In that sense, Xi’s description is valid.

In Gujarat, however, industry contributes 41 percent of the state’s GDP, while agriculture and services add 13 percent and 46 percent, respectively. This corner of western India is already a manufacturing powerhouse - and a model that the rest of India should find easier to emulate than China’s.

On Wednesday, Gujarat officials signed a series of agreements to deepen cooperation with Guangdong, the coastal province that has been the engine of China’s growth miracle. No doubt there’s much that India can learn from the mainland’s experience; at almost $900 billion, Guangdong’s GDP is almost 10 times that of Gujarat’s $96 billion.

Guangdong had unique advantages, though. China’s then-leader Deng Xiaoping chose the province to introduce economic reforms in 1978. The port city of Shenzhen, China’s first special economic zone, enjoyed geographical proximity to Hong Kong, a global economic hub. The province received major tax concessions, which it used to lure investors. China’s authoritarian political system allowed employers to keep wages repressed, which became the foundation for a cheap manufacturing base.

None of this is realistic for India, where it would be impossible for the federal government to single out one state, like Gujarat, for special tax concessions. India’s vibrant democracy wouldn’t permit a repression of wages either, nor the kind of strict controls on migration from rural to urban areas that still exist in China to some extent.

And yet, Gujarat has succeeded. Skeptics argue that the state is atypical for India. It has a long coastline and a historically entrepreneurial population. Other states also have long coastlines, though. None except Maharashtra - which enjoys the luxury of hosting India’s financial capital Mumbai - and, to an extent, the southern state of Tamil Nadu have industrialized the way Gujarat has. Even Guangdong, a coastal province with a proud trading history, had little to show by way of industry before Deng’s reforms. Policies matter.

Like Guangdong’s, Gujarat’s success is man-made. Even before India’s current Prime Minister Narendra Modi took over as chief minister of the state in 2002, the local government had established a liberal policy regime for industry. Under Modi, the state continued to slash red tape and minimize corruption. Compared with the rest of India, companies can acquire land relatively easily; Gujarat regularly ranks at the top of Indian states in terms of economic freedom. The government has invested heavily in infrastructure, including good roads, 24/7 power, ports and airports. By contrast Tamil Nadu suffers from acute power shortages. Maharashtra, outside of Mumbai, has awful infrastructure.

The so-called Gujarat Model may not be perfect. The state’s human development indicators haven’t entirely kept pace with economic growth. But it remains a promising test case, showing that the roadblocks to developing a manufacturing sector can largely be removed within the context of India’s democratic system. Throttling bureaucracy can be scaled back; new power plants can be built. Indeed, Modi focused his entire campaign around this promise - that he could replicate Gujarat’s success on the national level.

It is up to him to prove Xi’s stereotype wrong. To do so, the prime minister needs to liberalize the policy environment in New Delhi while devolving more authority and finances to states to improve their infrastructure. Modi could begin by reforming labor laws - which make it almost impossible to fire workers - and laws governing the acquisition of land; together those represent the two biggest obstacles to building a homegrown manufacturing sector in India. Investment from China, not to mention Japan and other nations, can help implement these policies, particularly when it comes to building infrastructure. But India shouldn’t need inspiration, at least, from abroad.

*The author is a journalist in New Delhi. Trained as an economist, he has worked at the Financial Express, India Today and Firstpost.com. He is editor of “Surviving the Storm: India and the Global Financial Crisis.”

by Dhiraj Nayyar