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India’s Search For A New Growth Model

Business, China, Company Strategy, Economics, Environment, India, Innnovation
By John Richardson on 10-Feb-2015


By John Richardson

THE great news is that China is moving towards a new, and potentially very effective, economic growth model.

Can we say the same for India?

The reason why I pose this question is because, since Narendra Modi has been elected as Prime Minister, a lot of my Indian contacts have talked about the need for more industrialisation.

India has a demographic dividend of a youthful population, rather than China’s demographic deficit of an ageing population. Thus, India can go some  way towards replacing China, in some industrial sectors at least, as the “low cost  workshop of the world”, some of my contacts are arguing.

They pick textiles as an obvious opportunity, given that the business is so labour intensive when you get to the point in the value chain of manufacturing shirts, blouses and carpets etc.  China, because its ageing population has led to rising labour costs, can no longer compete in low-end apparel and non-apparel production in its more-developed eastern and southern provinces.

Modi’s election has re-awakened hopes for industrialisation in India because of his pro-business reputation.It is hoped that he will sweep aside cumbersome labour, land acquisition and other regulations that have held back Indian manufacturing for so long.

There also appears to be more of a chance that India will make the infrastructure investments essential for a much-bigger industrial base,  thanks to Modi’s election victory. Better power supply, ports and roads are all essential if India is going to make the hoped-for “industrial leap”.

But there are three challenges here:

1.)    Nobody, anywhere, should be seriously thinking about “mass industrialisation” over the next few years given the extent of global oversupply – primarily, of course, as a result of overinvestment in China. We are facing a global deflationary environment where the priority needs to be paying-down and rescheduling debt, rather than adding to debt.

2.)    China’s “New Silk Road” project demonstrates how it still sees low cost manufacturing – whether relocated to its less-developed western provinces or outsourced to neighbouring countries –  as important for its future.

3.)    The consistency of government support in India. Modi can only achieve so much and, of course, he may not still be in the office after the next election. This doesn’t compare well with what seems to be a very stable policy direction in China.

There is another even bigger challenge here, which is worth separate  mention, and that is the environment.

Low-cost manufacturing in China was not just based on cheap labour, but also depended on poor environmental standards.

It is no exaggerating to say that China now faces an “existential” crisis as it tries to deal with the air, water and food pollution left over from its mass industrialisation.

If India were to go down the same path, it would be in a similar situation – assuming, and this is a big assumption, that the competing forces within its democracy allowed this to happen.

The alternative is sustainable industrialisation, but might that be at a cost that prices India out of low-end manufacturing markets?

So, here is the  last detail of India’s “Catch 22”: If it fails to sufficiently penetrate these low-end, mass employment markets it may not create enough jobs to take sufficient advantage of its demographic dividend.

It is worth also taking stock of where India stands on the environment at the moment.

“Last year the World Health Organisation assessed 1,622 cities worldwide for PM2.5  [one of the worst kinds of air pollution for human health] and found India home to 13 of the 20 cities with the most polluted air. More cities in India than in China see extremely high levels of such pollution,” wrote The Economist in this article.

The magazine added that:

  • Levels ofPM2.5 in Delhi are routinely 15 times above levels considered safe by the World Health Organisation. New data suggest that, on this score, Delhi’s air has been 45% more polluted than that of the Chinese capital for the past couple of years.
  • Former UN chief negotiator on climate change, Yvo de Boer, suggests that air pollution costs China the equivalent of a tenth or more of GDP and he warns India to avoid that fate. He urges India to “industrialise in a cleaner way”. And a study of agriculture in India from 1980 to 2010 found soaring levels of ozone and other air pollution, which has led to wheat yields a third lower than would otherwise have been expected.
  • Indoor and outdoor pollution is the biggest cause of death in India, claiming 1.6 million lives a year.

This again serves to illustrate how new approaches to economic growth are essential everywhere as the “New Normal” develops.

Sure, you can choose to bury your head in the sand and talk and think only in catch phrases, such as “India’s demographic dividend” and the “rise of India’s middle class”.

But if you take these kind of intellectual shortcuts, you are on the path to failure.