Indian government statistics released in June held a pleasant surprise for those with a stake in the Indian economy. India's Gross Domestic Product (GDP) for the January through March 2006 quarter grew by 9.3 percent, beating market expectations. That growth compared to 8.6 percent in the year-ago period, and came mainly on the back of a healthy 5.5 percent growth in the agriculture sector. Full-year GDP growth for fiscal year 2005/06, ending March 31, 2006, was revised to 8.4 per cent from a previous estimate of 8.1 percent.
The better-than-expected performance in the economy was also due to healthy growth in manufacturing and services, the report said. Manufacturing output, which accounts for nearly 16 percent of GDP, expanded at an 8.9 percent rate, faster than a revised annual growth rate of 8.3 percent.
Room to grow
"The Indian manufacturing sector has to grow much more before its full potential is realized, particularly when the share of manufacturing in gross domestic product has remained between 16 percent and 17 per cent during the last two decades," says Anwarul Hoda, member of the Planning Commission of India.
Hoda said the Indian industrial sector has shown signs of strength in recent years. Traditionally, the country has been strong in labor-intensive industries such as apparel, footwear, jewelry, leather and textiles. But of late, Hoda noted, it has emerged as a key player in skill-intensive industries such as auto components, hardware, generic drugs and specialty chemicals.
Hoda pointed out that the Indian manufacturing sector has by and large withstood the "competitive pressures" from imports, even as tariffs on industrial goods have been cut from the levels of more than 100 percent to a peak of 15 percent. Hoda said that domestic manufacturers have demonstrated their global competitiveness by notching up export growth by 20 percent or more during the last three years.
"With a growing middle class and their increasing purchasing power, domestic demand is likely to be a more powerful engine of growth than external demand," he said, adding that domestic-demand growth strategy is likely to be more successful in India's case than the export-driven strategy that has been practiced by the East Asian economies.
The realization that India is not just a provider of services but a huge market in itself is pushing companies across the world to rethink their strategy toward India. The effect of this can be seen across the manufacturing spectrum, from small to mid-sized to very large companies. They are all looking at India as a sourcing and manufacturing location.
As global multi-national companies (MNCs) move their manufacturing bases to India, several of them have realized that they need to create products for India locally. The primary reason for this is to achieve success not only in India, but globally as well. A silent but stirring revolution is under way among many eminent global high-end technology companies. After having established themselves firmly in the Indian sub-continent, utilizing local talent to work on essentially western problems, India has come a full circle now. Information technology (IT) majors are now seeking out help when it comes to producing products in the country itself.
This phenomenon has already sparked a lot of activity in companies including Alcatel, Cisco, Ericsson, Nokia, LG and Samsung.. India's dream of becoming a global manufacturing hub now seems to be moving in the right direction. So much so, that even high-end semiconductor chip manufacturing companies such as AMD and Intel are not far behind when it comes to committing themselves toward establishing their manufacturing bases in this region. The most recent technology major that plans to set its base in this part of south Asia is Dell. Having done so, it aspires to increase its workforce by 50 percent within two years.
U.S. conglomerate General Electric says it is considering India as a manufacturing hub. Indicating that the company was looking at enhancing its investment in India, Chief Executive Officer and Chairman of GE Worldwide Jeffrey Immelt said recently that "this is the right time to invest in India, and we will be bold on the market here."
India Finance Minister P. Chidambaram is also unflinching regarding India’s manufacturing future. "We will become a global manufacturing hub for small cars in the next three to five years," Chidambaram declared recently, adding, "we will emulate this success story in other sectors to become one of the world’s top three manufacturing centers."
India has displaced the United States to become the second-most attractive destination for foreign direct investment (FDI) among manufacturing investors, according to consultant A. T. Kearney's latest FDI Confidence Index rankings.
Will the manufacturing industry in India emerge as the major contributor in the overall growth of the country?
Despite the recent rapid growth, there is no evidence of overheating in the Indian economy, said Montek Singh Ahluwalia, deputy chairman of the indian Planning Commission. There is scope for further expansion in the manufacturing sector, Ahluwalia said. In fact, the high-growth rate can’t be 'sustained' on the basis of services alone, he added. "Manufacturing sector must be given greater thrust."
About the author
Uday Lal Pai is a freelance journalist based in India.