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India's economic opportunities and perils

Prabhudev Konana(The writer teaches at the University of Texas, Austin.)

The prospects of traditional manufacturing sectors such as textiles have become bright.

— Photo: M. Govarthan

TREMENDOUS POTENTIAL: A garment exporting unit in Erode.

LOOKS LIKE the stars are aligning for India for even greater economic prosperity. This is not, however, coming from the country's software prowess or IT-enabled services, but from old, traditional manufacturing sectors such as textiles and auto component industries. The promise has profound implications for the masses. However, India can derail its own engine of prosperity by not focussing on the right set of issues.

For starters, the removal of the textile quota and the potential Yuan revaluation are a boon. Garment exports from India to the United States grew by over 60 per cent since early 2005. With the Yuan revaluation, Wal-Mart is expected to increase its textile import from India from $1.5 billion to $5 billion.

Wal-Mart alone can provide a growth rate of 25 per cent to India's textile sector, so the potential is enormous when other large global retailers flock to the country. The fifth Heimtextil India conference — trade show for home textiles and accessories — last year attracted over 10,000 participants from 96 countries. Without much fanfare, all major retailers, fashion brands and intermediaries such as Li and Fung are establishing or expanding offices in India, matching that of the high-tech sector. Some estimates project textile exports to reach $50 billion by 2010 from the current $15 billion, equalling or surpassing the projection for software exports.

Key linkages

The promise for the masses comes from the linkages the manufacturing sector has with the rest of the economy. Textiles, for instance, have deep backward linkages with cotton and silk growers, cotton/silk processors, yarn makers, fabric manufacturers, designers, to tailors that touches rural areas, small and medium-size towns, and large cities. It is no surprise that in 1973 Western economies imposed the textile quota to protect these linkages and associated jobs.

The textile sector can employ skilled, semi-skilled and unskilled workforce from every segment of Indian society. The opportunity to increase income at the lower economic strata is truly great, unlike the pseudo increase reflected in per capita GDP. The backward linkages will invigorate other manufacturing industries such as those supplying to the textile industry and financial services and transportation, thus having a significant ripple effect. The benefits may far exceed those from export-led, software and IT-enabled services, which has primarily benefited the well-educated, urban workforce of India. Of course, cotton and silk still depend on the monsoon and, therefore, India's growth will depend even more on the rain gods.

However, the optimism must be tempered. The demand for water, electricity, roads, distribution and transportation system, and ports fundamental to manufacturing activity will increase more than ever before. Needless to say, despite the progress in the last 15 years, the situation in India on these fronts is bad, particularly in comparison with competitors such as China.

The CEO of a major logistics service provider in India, who spoke to a group of MBA students that I led from McCombs School of Business at the University of Texas, summed up India's distribution system as the "case of rotten apples" and a "case of bitter sugar." The delays due to the awful transportation infrastructure and procedures destroy perishable goods during transportation. He said it was more expensive to transport wheat from Punjab to Chennai than to ship wheat from the U.S. to Chennai. The road infrastructure, and inter-State transportation procedures and taxes are a big hindrance for smooth flow of economic activities.

While India has doubled its port capacity over the last decade, it still lags far behind competition like China. China is expanding port capacity by 20-25 per cent each year for the last 15 years, handling nearly $1 trillion. Given the increase in traffic in India, airport facilities for passenger and cargo languish each year.

The progress over the last decade of the new international airport in Bangalore, India's software capital, for instance, has been hampered by corruption and political fights. Contrast that with the $2.4 billion state-of-the-art Guangzhou Baiyun International Airport in China's Guangdong province that was built in record time with the finest facilities for passengers and cargo in the world.

India's IT sector bypassed the constraints since it relied on data communication infrastructure, which could be built relatively easily. It is not a surprise that Dell Inc. would set up call centres in India but not a manufacturing facility.

However, even the IT sector is feeling the pain now. Some big IT firms reportedly have a grand plan of airlifting foreign executives from airports to their facilities to avoid the mind-numbing experience through traffic and bad roads!

Despite the problems, India can be a powerful player in manufacturing. The number of Indian firms receiving the Deming Application Award for quality has increased to 10, with eight of them receiving this award since 2002. India has enormous expertise in making parts and auto components.

Sundaram Fasteners Limited has been regularly winning "supplier of the year" award from GM.

Indian firms are on acquisition mode of manufacturing facilities and mines worldwide. But, India needs quality skilled labour and more technical training schools, which have become backburner issues in the last decade given the focus on computer education.

India's handicraft, cottage and furniture industries are strong as well, but to a large extent untapped. If India plans well, it can be an equal partner with China to fill up Wal-Mart, Pier 1 Imports and other giant retailers in developed economies.

The handicraft and furniture sectors can employ millions with traditional skills, but no education to move into the IT sector.

Reason for hope

There is reason to be hopeful. The mood is upbeat among government bureaucrats, courts, and executives. The Reserve Bank of India removed "control" (like foreign exchange control) from their operations since it psychologically assumed they "control" and not "facilitate" transactions! Can that mindset percolate to the lowest levels of government bureaucracy where corruption is growing uncontrollably?

Ironically, the growth of the manufacturing sector and exports will be a boon for India's export-focussed software sector. Local consumption of IT products and services will increase from the current abysmally low levels as firms need to interact efficiently with other economies. American firms will benefit as well with exports of computers and software. The increase in per capita income and disposable income will rapidly increase internal consumption of goods and services, which provides more opportunities for U.S. firms.

Prime Minister Manmohan Singh and key policy makers are found oft-repeating China's miracle growth through manufacturing. Can India replicate China's obsession for economic prosperity and seize the moment fast and furious? After a long time, there may be some real opportunity for the Indian masses who are far removed from the glamorous IT sector.

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