There is concern that Industry 4.0 —where data and automation in ‘smart’ factories transform traditional manufacturing — may make it feasible for leading firms to re-shore manufacturing back to advanced economies, and closer to final consumers.
The global economy is undergoing profound change.
New technologies are impacting prospects for manufacturing-led development that has brought rapid prosperity to many parts of the world. Today, robotics, artificial intelligence (AI), 3D printing and the Internet of Things (IoT) are reducing the importance of low-wage labour.
There is concern that Industry 4.0 —where data and automation in ‘smart’ factories transform traditional manufacturing — may make it feasible for leading firms to re-shore manufacturing back to advanced economies, and closer to final consumers. China, too, is automating rapidly and is projected to be the world’s largest user of industrial robots by 2018.
The en masse migration of labourintensive manufacturing activities to poorer economies with lower labour costs such as India may, therefore, not occur. How, then, can India compete?
The growth of manufacturing in India has been modest — with its share in GDP largely unchanged over the last two decades — especially when compared to the services sector. Globally, too, while India’s share in global manufacturing production increased from 1.1% in the early 1990s to 2.8% in 2015, China’s galloped from less than 5% to 25%.
Even so, India has made greater progress in some manufacturing sectors. For example, since 1995, it has ranked among the top 10 exporters of labour-intensive goods such as textiles, apparel and leather products, jumping to fourth place in 2011.
India has also maintained its comparative advantage in the export of pharmaceuticals and a range of commodity-based manufactures over the last two decades.
Although the criteria for becoming amanufacturing hub are now changing, some manufacturing industries are likely to remain relatively unaffected by Industry 4.0. This includes a range of commodity-based manufactures — basic metals, wood products, paper products and food processing — which are also less traded and, therefore, subject to less international competition. They will remain feasible entry points for India.
Go Hell for Leather
India can also remain competitive, at least for some time, in its traditionally strong areas such as the productionof textiles, apparel and leather products, which is the least automated subsector so far — as long as it combines low wages with other reforms that enable it to compete.
India’s nascent success in the export of autos and electronics may, however, be harder to scale up. The use of robots in these industries is more widespread. They require closely clustered suppliers that can provide inputs on just-in-time basis, tilting the balance in favour of established manufacturing centres.
India’s large domestic market is an asset. Foreign direct investment (FDI) to manufacture in India for India may, therefore, be less influenced by cost considerations associated with establishing export platforms. The large market will also likely continue to provide room for the domestic manufacture of lower-price goods.
Take, for example, India’s two-wheeler auto sector, which has withstood international competition by producing low-cost, durable scooters and motorcycles with ubiquitous distribution and service networks. The scope for productivity gains may be even greater for lower-price goods where India can exploit opportunities beyond the domestic market. The country’s exports of pharmaceuticals and three-wheeler scooters to other lower-income economies, especially in Africa, is a case in point.
Notwithstanding these opportunities, the heightened global competition resulting from automation technologies will raise the bar for success in export-led manufacturing. India must, therefore, prepare now to remain relevant. If it can integrate its growing labour force with substantial improvements in the business environment, logistics and other backbone services, regulatory requirements, and so on, this may reduce the incentive for firms to relocate to higher-income countries with Industry 4.0 technologies.
Yet, if there is a limited window to industrialise using older technologies, reforms that improve the country’s competitiveness and connectedness acquire greater urgency. India’s recent rise to the top 100 in the Doing Business rankings is a step in this direction.
But there is more distance to cover.
Similarly, India’s restrictions on trade in services — many of which are increasingly embodied and embedded in manufactured goods — are among the highest in the world and will need to be eased.
To prepare for ‘smart’ manufacturing, the diffusion of new technologies will require higher-order skills, better information and communication technology (ICT) infrastructure, astronger intellectual property rights (IPR) regime, and complementary professional services. Since developing the capabilities of workers, firms and supporting institutions is likely to be a gradual process, India must start planning now.
No Rocket Science
Here, too, the country can leverage some of its unique strengths. First, its world-class institutes of higher learning in engineering and management sciences have created pockets of skilled labour that can respond to changing industry demands. Second, India’s vast diaspora in the science and technology space can facilitate the transfer of technology and skills.
Third, with the increasing ‘servicification’ of manufacturing — where the use of data will play an increasingly important role in optimising processes — India’s success in software services can lay the ground for the greater integration of such services into production.
Hallward-Driemeier and Nayyar are senior economic adviser and senior economist, respectively, World Bank, Washington DC
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