Success in Service Sector

India has the advantage of having a large number of English-speaking people. This is one reason why there has been strong growth in the service sector in India, as many large foreign companies have moved some of their “back-office”, administrative and sales support functions, to cheaper locations. Growth in IT, for example software development, has also been strong in parts of India. This growth in services has placed a strain on communications infrastructure.

Shift in Emphasis to Manufacturing?

For both China and India a big potential problem is the existence of a large rural population with very low incomes: peasant farmers using very labour-intensive methods. For many years the Chinese authorities aimed to raise the standard of living of its rural population, but in recent years there has been success in encouraging people from rural areas to move to cities to find employment that pays better than traditional rural occupations. India’s policies have traditionally favoured the agricultural sector, as small farmers are a very important part of the electorate. As with China, faster growth of industrial output in India may require further policy shifts, with potential for political reactions.

Not 1st Choice for Low Cost Manufacturing

Despite its low labour costs, India has not been a very popular choice for foreign investors seeking to establish low cost labour-intensive manufacturing operations, such as harness assembly. Where operations have been set up in India, they have generally been aimed at producing goods primarily for the Indian market, rather than for export markets. Foreign investors focused on export markets have usually preferred to set up low cost operations in other parts of Asia (such as China and the Philippines), rather than India.

Location Not Ideal

Physical distance is one issue that has counted against the country, as India is not as conveniently situated for European markets as alternative much closer locations, such as Eastern Europe or North Africa. India is also less conveniently located than Pacific Rim countries for supplying to Japan or the West Coast of the US, or Mexico and Central America for the US. However, less important than distance is the potential time-lag involved. Shipping goods to and from India is likely to be time-consuming. India has not yet shaken off its image of having a slow-moving official bureaucracy that can impede trade and other business operations.

India Has Lagged Asian Countries

Some other countries in Asia have been much more successful than has India in attracting investors to dedicated special economic zones (SEZs). In the Philippines, for example, there has been strong growth in harness assembly operations focused on exports to Japan and the USA. In SEZs the bureaucracy associated with import / export trade and with foreign investment in manufacturing is minimized for operations that are dedicated to export business. India has in fact had export processing zones (EPZs) for many years, but until recently activity in these Indian EPZs has not developed as strongly as in other countries.

From EPZs to SEZs

More recently, the Indian government has introduced new, more liberal regulations to attract more foreign investors and hence to increase employment in manufacturing, converting the existing seven EPZs into SEZs, adding additional ones, and giving approval to many more. Not only deregulation, but also high grade infrastructure is an important feature of the SEZs. Potential foreign investors have sometimes been discouraged by poor infrastructure, as for example with some manufacturing where reliable power supplies are essential. According to Fitch Ratings India, the cost of most infrastructure services in India, except for telecoms, is 50% to 100% higher than in China. There has been less labour flexibility in India than in other Asian countries.

SEZs Grow in 2006

Taking a lead from China’s success, in 2005 the Indian government introduced an additional SEZ Act, aimed at accelerating progress, through extending the exemption of enterprises in SEZs from taxes and duties. Items required for SEZ infrastructure development can also be purchased free of duties. Though there has been some clear success through growth in SEZs during 2006, the Indian version looks likely to fall short of the Chinese achievement. From the point of view of the foreign investor, in India there remain question marks concerning more restrictive labour laws and continuing weaknesses in infrastructure.

Growing Car Production

The auto industry provides a good illustration of the growth of an Indian industry whose production is aimed at the domestic market. Monthly production of passenger cars in India has risen from 60,000 to 70,000 in mid-2003 to over 100,000 in recent months. The largest producer is Maruti Udyog, in which Suzuki has a major stake. Indian manufacturing operations also produce large numbers of two-wheelers (6.5 million in 2004/05), especially small motorcycles. Once again, a Japanese group, in this case Honda, has a major interest.