Why I See the Future Of Manufacturing Outside of China

As the world awaits China’s latest GDP growth figures to confirm if the manufacturing powerhouse is finally unable to achieve 6% growth, another populous nation is taking steps to pick up the slack. Like it or not, India is going to be the new giant of manufacturing as China pursues its new consumption based economy. Consequently, India is only going to go from strength to strength as its low wages, and Modi’s “made in India” policy, provide new sources of cheap goods for the world economy.

Firstly, Indian manufacturing is a pillar of the nation’s economy and is set to continue to grow as China shrinks away from the sector. Specifically, the Indian manufacturing provides around 16% of the national GDP and 66% of exports for the country. Furthermore, some estimates state 12% of the workforce is tied to this sector. Additionally, the same sources demonstrate that close ties between Indian manufacturing and services sectors provide a significant multiplier effect. As a result of the effect, every job created in manufacturing is predicted to create additional 2-3 jobs in the services sector. Therefore, it comes as little surprise as to why the Indian government puts such stock in the industry. This sector can provide a means to keep more of its people employed and productive, something Modi desperately needs.

Empirically, we already see the Indian economy moving to provide the world’s manufacturing requirements as China reduces this component of its own economy. In the past year, we have yet to see China post a manufacturing PMI above 50.0. Conversely, India has posted manufacturing PMI figures in excess of 50.00 consistently since late 2014. As a result, should the debate around the global slowdown cease to centre on China and instead focus on how to make better use of Indian manufacturing potential?

At least one western economy has been taking steps to make preparations for China’s eventual move away from manufacturing. While it is true that Australia has been in pursuit of a free trade agreement with India for years, the agreement is now nearing completion. Only recently in a Bloomberg interview, Australia’s Special Trade Envoy Andrew Robb was documented stating that “In the decades ahead India will be as important to Australia in trade terms as china is today.” Considering how China-dependent the Australian economy is, the statement is no small prediction. Due to the pre-eminence of manufacturing in Indian exports, it is fairly certain that this sector will be driving the growth of Australian-Indian trade.

As much as India would like to be the world economy’s manufacturing juggernaut, it is important to see if the nation actually has a comparative advantage do so. Classically, low wages in this sector has been the edge developing economies have used to entice manufacturing demand. Fortunately, India demonstrably has not only a low wage advantage compared to economies like the US but more importantly it has an advantage against China. Specifically, the typical employee in the Indian manufacturing sector can expect a wage of approximately $1,831USD per annum as opposed to the approximate $7,947USD received by their Chinese counterparts.

Whist low employee wages are not the only factor which will decide India's manufacturing aspirations, it certainly supports their argument. Consequently, getting bent out of shape over the Chinese slowdown may be overzealous as we are overlooking the potential of the Indian economy. However, the transition is unlikely to be seamless. Policy makers should take a page out of Australia’s book to ease the swing towards a future “Made in India.”