Is India The Next China?
In 2010, Nokia's factory near Chennai, India was among the largest in the world. Thousands of workers, most of whom were women, churned out over 15 million phones per month. Nokia was a shining example of the kind of success that India wanted with manufacturing. But in 2014, the plant suddenly had to shutter.
Why? Because of a tax dispute. Mobile-phone-making major Nokia shut down its largest plant at Tamil Nadu, Sriperumbudur, making over 8,000 workers jobless. The dispute was over a $1.5 billion tax demand, slapped on retroactively by authorities for alleged owed taxes.
Essentially this factory became a ghost town. Eventually, Nokia and the Indian government would settle, but the damage was done. And there are other examples too: British companies Vodafone and Cairn Energy along with at least 17 other companies were all involved in disputes.
And while this has been happening, Prime Minister Narendra Modi has been trying to attract foreign investment. Make in India has become the biggest plan that India has ever created. The bureaucracy can often go against whatever it is that the political class is expressly trying to achieve.
While India might be securing jobs for its highly skilled elite, complicated, uncertain taxes have pushed most foreign companies in need of cheap labor towards China. That's costing the economy an estimated $140 billion a year. They've been saying they're open to the rest of the world, but you know, there are still a lot of protectionist barriers in doing business with India. To follow in China's footsteps and reach the government's goal of being a $5 trillion economy by 2025, India needs to create a model which succeeds both at home and abroad. For hundreds of years, the Indian subcontinent was among the richest places on earth, accounting for an estimated 25% of global trade.
Then came the British. Essentially, Britain kept India as a supplier of raw materials for its own factories and as a market for what those factories produced. It's estimated that in today's money Great Britain extracted $45 trillion from India. Fast forward to the late 1940s: India gained independence to form a multiparty democratic system of government.
And across the border, the Chinese Communist Party came into power to form the People's Republic of China. Suspicious of the west, and lacking in things they could sell to the world, both took a page out of the Soviet Union's economic playbook, turning the countries inward. There was a sense that they could, of course, feed themselves and sustain themselves. China wasn't the only economy to look inward. But generally speaking, the sense of looking inward was considered to have been a big contributor to the depression in the '30s. In the case of India and China these centrally planned economies ultimately didn't work.
But while their economies largely stood still, a select few neighboring economies boomed. They became known as East Asian Tigers. Hong Kong, Singapore, Taiwan and South Korea: They were known as economic wonder childs from the 1960s onwards. They boomed in the post-war period. They had cheap labor, they had industrial know-how and they embraced technology. So all of the toys and clothes and trinkets that the western world was buying in the '60s and '70s and 80s, all of that was made in these tiger economies.
It was an economic model that was an envy of the world. But there's no doubt when it comes to the ultimate model for China, they have looked to Singapore. Chinese officials flooded into Singapore routinely to visit, for study and to learn from Singaporean know-how.
Obviously the scale doesn't compare, but what China saw in Singapore, they liked. There was that degree of authoritarianism. There was that degree of anti-corruption. There was of course that sense of efficiency and productivity and its industrial- and export-led model. China liked it, and they looked to Singapore, and they embraced a lot of it.
In 1978, Deng Xiaoping announced the Open Door Policy, to allow foreign companies to set up in China. Their biggest asset: a seemingly limitless low-skilled workforce that could fill large factories with laborers. They had huge workforces, huge industrial facilities, and they were hungry for foreign capital, foreign know-how and foreign investment.
And when all of those ingredients were mixed together, what you saw was a great shift of global manufacturing into China, especially of low-end goods, toys, plastic, linens, trinkets, all of that shifted to China. And we saw an explosive manufacturing boom in the '80s and in the '90s especially. China averaged 10% growth per year in the year since it opened in 1978.
Almost 800 million people have been pulled out of poverty in China since the great reopening. Starting in the mid-'80s and then in a big way after 1991, India also opened its doors. Although not normally thought of as an exporting powerhouse, India's export growth has been the third best in the world, behind China and Vietnam. That has been a big puzzle because yes, India is an exporting success story, but what is it that India actually makes and exports? Instead of low-end manufacturing such as trinkets and textiles made by China and other East Asian Tigers, the country has uniquely focused on high-skilled manufacturing and services, such as software, business-process outsourcing and engineering goods. This has created a bias in jobs and opportunities for a relatively small, English-speaking, well-educated minority. But those previously left behind are getting another shot thanks to technology.
To give you an example, a seller who used to have a brand or used to have a product, which was limited to one district or one city had no idea how to expand the distribution and reach to 4,000 miles away from their home city. But because of the digitization of economy, a seller can now dream big, they can think about becoming an Indian large entrepreneur versus becoming a entrepreneur only for that particular city. With the help of apps like Udaan, Indian entrepreneurs are getting access to tens of millions of retailers catering to 1.3 billion consumers. And the mom-and-pop shops selling these products, known as kirana stores, can make better purchases faster, and receive credit they would otherwise struggle to get. Before the platform existed, they will rely on multiple sources. They will rely on local distributors.
They have to do multiple price negotiations because every time they have to do multiple deals. They will have to find multiple lenders to provide them. Then they will need to coordinate the transportation to get the goods, or to make sure that they are available in their store to receive the goods. Access to smartphones and cheap data is transforming industries that have been stagnant for a long time. It's enticing new entrepreneurs to produce and sell products with money pouring in from investors in Silicon Valley hoping for a piece of the industry.
Local manufacturing boost will really help because you will see a lot more Indian brands dominating the shelves in India and overseas. And this whole digital economy and internet is providing that platform to give that access to information, access to product, access to capital, access to credit, and that's really helping our economy. Another economic boost is coming in the form of generous government subsidies to makers of everything from electric cars to textiles. And as these industries grow, India can tap into its most obvious advantage: its booming population, set to surpass China over the next decade. Now, the tide has turned and the Chinese population from here on is only going to become older. The median population age in India is still below 30, and India still probably has around three decades before its population too is considered old.
Now that's three decades, a wonderful opportunity. If India plays its cards right, 500 million people will enter the middle-income class over the next decade. This will be the largest growth into the middle class anywhere in the world, fueling massive domestic demand.
As the middle class grows, the purchasing power will come. So India definitely has a story to tell the world, that it is ready to fill the gap that is going to be left behind by China as two things happen. One, as China wants to move out of low-value-added, low-skilled markets, and as the economic estrangement between Beijing and Washington grows, India has a role to fill. But choosing India over countries like Vietnam still has many disadvantages. Although almost every industry is now open to foreign investment, import tariffs have been increasing since 2018.
And the import process remains convoluted and time consuming, a drag on today's interconnected global supply chains. The problem is at the level of customs and the level of disputes with the customs authorities on whether something is chargeable. So the Indian government is involved in just too many tax disputes with its private sector. Income-tax disputes, import-duty disputes, GST disputes now.
Modi's Make in India campaign is threatening a return to the failed socialist model of self-reliance, something that might only benefit a select group of politically connected firms. In India, politicians do have to go and win elections every five years. And these are very expensive elections, and they have to be fought with corporate donations. So, which means that in India, the political class has to strike a balance in terms of how it deals with the private sector. But high tariffs and other trade barriers might restrict Make in India to just Make for India, when the much larger opportunity is in making things for the world.
It's simply not possible to become an exporting powerhouse just by yourself without importing anything from anybody. Just to give you an example, India is a big exporter of human hair. India's tradition of sacrificing hair at temples and the practice of saving and collecting hair from individual households means that it's become the world's largest supplier of human hair.
The majority gets exported for manufacturing into wigs, mannequins and also other extension products and made into products suitable for different markets across the world. But before exporting hair, companies may need to add imported products to it in order to boost value and grow their business or make it suitable for international clients. The barrier comes or the challenge comes when you want to do value-added products, and the value-added products you need to import, for example, keratin glue, a type of protein glue which is made in Italy or China, which clients prefer. Now, there is another product, which is imported lace. Now all of these importation, the process becomes a challenge for the smaller ones to grow bigger. Confusing taxes and high import tariffs meant to protect the local market from foreign competition are major hurdles companies face when trying to access overseas markets.
It might be sounding crazy to you that it should be straightforward. A chemical used in a company in China should be able to be imported. But apart from these importation challenges, the import taxes are generally kept high because they want to use the local source. But being the hair industry, and it is not an industry which is well-developed in India, so for us, import is a big requirement.
Whereas the Indian government does not understand that the importation, if they bring it down, will be a long way in terms of making more further value-added products. Although larger companies like Raj Hair International have worked with the government for decades to grow their business, many smaller companies in India aren't so lucky. It's kept expansion and those crucial salary jobs at a minimum. I think the statistic is 87%. That is the workforce that is either in agriculture or is self-employed or is casual labor. And only about 10% are getting a salary from someone.
Beyond that 10% of workers earning a steady salary, most live day to day with little to show by way of social security or medical insurance. You have a country that is teeming with surplus labor, a situation that has been made infinitely worse by the coronavirus pandemic. And yet India is not able to demonstrate to the global community that it is actually serious about inviting and then retaining the capital.
Another major missed opportunity in India: its unemployed female population. Its female participation rate is among the lowest in the world. You today have a situation where Bangladesh's women in workforce participation rate is 40%, and India's is 20%. Probably India has gone down even further after the coronavirus pandemic because a lot of women workers, more so than men, lost their jobs.
But clearly you can't be making progress at the level at which India wants to progress if only one-fifth of half of your population is going to be employed in the workforce. Bangladesh, which started out as a much poorer country and established independence with the help of India, has recently passed India in GDP per capita. Bangladesh is playing to its strengths.
It is not doing high-tech manufacturing. It is essentially doing low-skilled work, work which is going to absorb its labor. There are signs this would also work in India.
In the state of Tamil Nadu, where the Nokia factory once ran, a number of manufacturing facilities have been built in the last decade. Now the state has the second-highest GDP and one of the highest female participation rates in India. So clearly there is a kind of advantage for women to get into new factories and jobs. As late as probably last month, the Ola company has started electric scooters and the entire manufacturing for the first time is done by women.
Only women workers have been mobilized. And this entire factory and manufacturing is done by women with the help of robo. It has also broken the myth that in the manufacturing sector or in the automobile sector, you require male help. Although gender and caste inequalities still exist in India due to differing education and treatment from a young age, regular, secure work may offer a way out of the cycle.
Now if you take IT sector employment, almost 80% are all from the so-called forward caste. However, welcoming factories into India means there will be infusion of informal sector workforce, particularly women into manufacturing sector, which is happening and which is going to bring about what has been already conceived from 1990s. It will be a new growth model as well. While the Indian government declined to comment on record, they have taken steps to try and make doing business easier.
The goods and services tax or GST consolidated several state and federal taxes into just one. And they've stopped allowing retroactive taxation. But the country will need to go even further if it's to challenge its biggest competitor.
Well, India is this economy that's always considered to be the next China, but every time this conversation comes up, it's still the next China. One reason, by the way, economists say what China did may not work for India. That's called automation. China took advantage of cheap manual labor and making goods for the rest of the world. Now we're moving into a world of rapid automation.
So India can throw open its doors and offer cheap factories to the rest of the world. But in fact, a lot of companies and multinational companies are saying, we're embracing robots, we're embracing automation. The model that worked for China may not necessarily be a carbon copy for India. When you say China, it is got a positive vibe when it comes to manufacturing and a negative vibe in a geopolitical way. So India doesn't want to be the next China, I think so. India will be India.
At the same time, we will be up-skilled and developed in our own processes, but India definitely will stand by the world to be the next big manufacturing hub to source and get products developed for the world market. The focus has to be on making the society work for everyone and to give everyone a stake. Now that is something that East Asia did very well because somehow they managed to get a buy-in from the public at large for their policies, by showing them the way to a better future, if not for them, then for their children.