ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Quest for an Indian Manufacturing Future

Industrialisation for Employment and Growth in India: Lessons from Small Firm Clusters and Beyond edited by R Nagaraj, New Delhi: Cambridge University Press, 2021; p 260, `950 (hardback).

The manufacturing sector occupies a special place in the theory and practice of economic development and structural change. Historical experience as well as economic theory stro­ngly suggest that sustained increases in per capita income occur only after the manufacturing sector reaches a certain critical size in terms of the share of GDP as well as employment. Compared to agriculture, construction or services, aggregate output growth in manufacturing is more strongly correlated with aggregate gross domestic product (GDP) growth due to extensive backward and forward linkages of this sector with the rest of the economy. And due to economies of scale and
embeddedness of new techno­logy in new investments, the growth of output causes productivity growth in this sector. These “Kaldor Laws” along with the capacity of manufacturing to show “unconditional convergence” or catch-up of labour productivity independent of country-specific characteristics make this sector special (Rodrik 2011; Storm 2015).1 In late industrialising countries such as India, the problem takes on a new dimension—how to develop industrial capacity, infrastructure and competitiveness in a global economy consisting of far more efficient firms? A vigorous debate has raged on the extent to which industrial policies like subsidy and trade policies like tariffs contributed to late industrialisation success stories like South Korea, Taiwan or more recently China (Amsden 2001; Cherif and Hasanov 2019; Lane 2021). In the 21st century, the story of industrialisation has met a new plot twist—the challenge of climate change.

With the Indian policy commitment to manufacturing having received a new boost in the form of Make in India, the questions that confront us today are the following: Does Rodrik’s (2016) thesis of “premature deindustrialisation” indicate that it is too late for “late industrialisation”? Is there a path to industrialisation that can capitalise on the special properties of manufacturing mentioned above, while avoiding the 20th century ecological pitfalls? Can such a path draw on India’s strengths, namely an enormous number of small firm clusters all across the country, often drawing on decades, if not centuries of manufacturing tradition? And perhaps most importantly, can manufacturing create enough emp­loyment to contribute to India’s structural transition—something that it has thus far failed to do?

India’s Manufacturing Future

The present volume is a significant contribu­tion to this quest for an Indian manufacturing future. R Nagaraj, in his Introduction, identifies the central question as–how to promote employment and output growth in labour intensive industries or labour-intensive segments of capital-intensive industries. The book presents case studies of eight labour-intensive industrial clusters along with a study of the Indian automobile industry based on secondary data. The clusters included are knitwear in Tiruppur (Tamil Nadu), cera­mics in Morbi (Gujarat), sports equipment in Jalandhar (Punjab) and Meerut (Uttar Pradesh [UP]), locks in Aligarh (UP), foundry products in Howrah (West Bengal), garments in Kolkata, leather goods in Dharavi (Mumbai), and machine tools in Rajkot (Gujarat). The introduction sets the context for the studies and presents findings that emerge across field sites. And the concluding essay by Sunil Mani presents evidence on how automation is transforming manufacturing across the world. The diversity of products as well as states in the chosen case studies makes for a very instructive study in common themes as well as contrasts.

Each case study combines primary field data with secondary sources to paint a detailed picture of the cluster. One point on the research method is worth noting here. Since complete lists of small firms in industrial clusters are generally not available, drawing a random sample for a study is hard. All the field studies in the volume depend on purposive sampling. Hence, the findings are not necessarily representative of the cluster or industry. But what they lack in representativeness, the studies more than make up for in richness of information, and identification of potential mec­hanisms that can explain dynamism or stagnation. This is no mean feat bec­ause, as anyone who has interviewed small firm owners knows, getting quality information out in interviews requires patience and tact. Often relationships need to be built over time before entrepreneurs share meaningful information on their businesses.

The themes that frequently crop up in more than one chapter will be familiar to scholars and students of industrial policy and industrialisation: the central importance of learning by doing and agglomeration economies (Marshallian exter­nalities), and of technological upgrading. The reader also gets a good sense of how supply-side factors such as access to skilled labour, technological inputs, electricity, and other infrastructure as well as demand-side factors such as niche or mass markets, competition from imports and export demand constrain or enable firm and cluster growth. In addition to these issues, the case studies also highlight the importance of collective action and business ethics or trust. Finally, since many of the field studies were conducted during 2018–19, the effects of demonetisation and the introduction of Goods and ­Services Tax (GST) also feature in several chapters.

The study on the Morbi ceramic cluster (tiles and sanitaryware) by long-time industry observer Keshab Das attempts to explain how the cluster has evolved over two decades (since the mid-1990s), in terms of technology, markets, and business practices. Entrepreneurial attitudes to technological upgrading that emerge as a key factor is why the cluster has managed to remain competitive domestically as well as in the export market. Das notes that firms in Morbi have “made persistent efforts at promoting an innovative ethos…to enhance both pro­duct and process qualities” (p 115). Interestingly, despite a rise in capital inten­sity over this time, the average number of workers employed per firm has remai­ned the same (around 45). Such examples enable us to improve our understanding of exactly how mechanisation affects job creation. The chapter by M Vijaybaskar on the well-studied Tiruppur knitwear cluster also focuses on pro­spects for upgrading. The author is a long-time observer of this cluster and brings his deep institutional knowledge to bear in order to identify factors that are enabling or constraining Tiruppur’s question to upgrade itself in the global value chain.

India’s Strengths

A noteworthy theme that emerges from several case studies is the relative advantage that Indian clusters have in niche products, competing on design and quality, as opposed to mass products where the competition is mainly on unit costs. For example, in the study on the Rajkot engineering, Awasthi and Shah note that the firms in this cluster have been able to compete with Chinese firms in global markets not only because of lower labour or environmental costs but also drawing on indigenous engineering skills and long experience in producing customised products in small quantities in niche markets. This is a recurring observation of several of the volume’s authors—where China usually wins on mass-produced goods, India’s strength lies in niche ­markets.

This is closely linked to traditions of imitation and innovation that have flourished in an environment of weak intellectual property rights. The case study on Dharavi that documents how the cluster transformed itself from leather production to manufacturing of leather goods, emphasises the importance of ­reverse engineering and imitation in product innovation. The author also notes that more than formal degrees, what is needed is systematic skill improvement and training. As many other cluster studies have noted (in this volume and elsewhere), Indian workers and entrepreneurs are not lacking in innovative spirit. But they are constrained by lack of information, infrastructure, and capital.

The Road Ahead

The literature of industrial clusters has also long recognised the distinction between low road and high road competitive behaviour. The former relies on cost-cutting via lowering of wages, ext­er­na­lising costs, compromising on quality and outright fraud. The latter, on the other hand, draws on productivity-­enhancing innovations and positive ext­ernalities of collective action. The case study on Howrah’s foundry cluster illustrates the problems of hazardous working conditions and other problems of the “low road” of informality in industrial clusters including lack of institutional credit, outdated technology, and lack of cooperation among owners. On the other hand, where efforts at collective action on part of firm owners have been more successful (such as in Morbi), they play a key role in identifying new sources of technology, repair and services, lobbying for lower tax rates, and levying of anti-dumping duties, familiarising entre­pre­neurs with export procedures, and so on.

Commenting on the importance of “commercial honesty” and business ethics for successful industrial development, the noted economic historian ­Alexander Gerschenkron (1966) observed that “a sociology of economic honesty still ­remains to be written.” The journey from being a society that believes in the maxim “he who does not cheat, does not sell” and where mercantile activities and deceit are regarded as inseparable to a modern economic ­society where basic honesty in transactions can be taken for granted, is, for Gerschenkron, synonymous with industrial modernisation and development. Sadly, Indian industrial clusters are still rife with dishonest prac­tices that stand in the way of the high road to competitiveness. And when trust (or lack thereof) is being discussed, can caste be far behind? The present volume offers exa­mples of this. But it also offers hope for the future. For example, Keshab Das notes that the Morbi Ceramic Association, an umbrella organisation in the cluster has explicitly recognised this problem and started initiatives such as “Fight against Fraud” to improve ethical practices.

As Nagaraj notes in the Introduction, the share of the manufacturing sector in output as well as employment have been relatively stagnant over the past quarter of a century. This problem requires ­urgent policy attention. The present volume provides much food for thought in this respect. Encompassing industrial policy, business practices, skill landscape, market dynamics, technological upgrading, working conditions, collective action and much more, the book is an invaluable addition to the literature on prospects for industrial growth in ­India in the 21st century.

Note

1 I am setting aside here the vigorous debate on whether certain tradable services can substitute for manufacturing in this story (Amirapu and Subramanian 2015).

References

Amirapu, Amrit and Arvind Subramanian (2015): “Manufacturing or Services? An Indian Illustration of a Development Dilemma,” Working Paper 409, Washington, DC.

Amsden, A H (2001): The Rise of the Rest: Challenges to the West from Late-industrialising Economies, United States: Oxford University Press.

Cherif, Reda and Fuad Hasanov (2019): The Return of the Policy That Shall Not Be Named: Principles of Industrial Policy, Working Paper No WP/19/74, International Monetary Fund.

Gerschenkron, Alexander (1966): “Reflections on the Concept of ‘Prerequisites’ of Modern Industrialisation,” Economic Backwardness in Historical Perspective: A Book of Essays, Cambridge, Massachusetts: Harvard University Press.

Lane, Nathan (2021): “Manufacturing Revolutions: Indu­strial Policy and Industrialization in South Korea,” SSRN 3890311, file:///C:/Users/Acer/Downloads/paper.pdf.

Rodrik, D (2011): The Future of Economic Convergence, Massachusetts, Cambridge: National Bureau of Economic Research.

— (2016): “Premature Deindustrialisation,” Journal of Economic Growth, Vol 21, No 1, pp 1–33.

Storm, S (2015): “Structural Change,” Development and Change, Vol 46, No 4, pp 666–99.

 

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Updated On : 8th Jul, 2022
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