---

Guest Column

As a result of the COVID-19 pandemic and US-China tensions, global manufacturers have been actively seeking strategies to diversity their supply chains and reduce their reliance on China as the major manufacturing supplier. Thailand, Malaysia and Vietnam were among the initial sought-after destinations for global capital, and recently, India has also started to attract interest.

Companies that have started production in India or are in the process of sealing the deal include Apple, Boeing, Nokia, Ericsson, Samsung, and LG. Samsung took the trouble to clarify that “products manufactured in India are mainly sold in the Indian market, with some exported to African countries.” This comment from Samsung exemplifies the dilemma facing global capital considering a shift to manufacturing sites to India. On the one hand, the shift is urgently needed given the labour cost and geopolitical advantages India can bring, yet on the other hand there are concerns about India’s possible unpreparedness and the resulting problems of short-run risks and long-term sustainability.

Weighing Pros and Cons

To start, moving some manufacturing capacity to India has several advantages for global manufacturers. As was revealed by the pandemic, the current global supply chain relies heavily on China’s manufacturing capacity, and once the country went into lockdown, transnational corporations (TNCs) were immediately affected. Even without the pandemic shock on the global supply chain, tensions between US and China, starting with the trade war but now intensified by conflicting positions on the Russia-Ukraine war and Taiwan sovereignty, constantly alerts global capital to the need to find back-ups. India has emerged as a top candidate, with its Western-friendly parliamentary democracy, a much younger population, and growing policy supports including tax cuts for corporations, the establishment of the special economic zones, and a $26 billion incentive plan to promote investment in local industry.

However, these advantages sometimes prove to be the source of TNCs’ hesitance. One of the biggest ironies is that business analysts have cast doubt on the efficiency of India’s decision-making precisely because of its status as the “largest democracy,” since there are “too many stakeholders to satisfy.” The challenges and risks awaiting such business decision-making can be summed up in the World Bank’s Doing Business 2020 report, in which India was ranked at 63rd among 190 countries for “ease of doing business,” much lower than China (31st).

Aside from the perspective of global capital, there is a more pertinent labour question at hand. For businesses, a rational economic decision is to lower the cost of labour to reap as much profit as possible. However, China did not become the world manufacturing center just because it had ‘cheap labour.’ True, wages were extremely low in China when it first joined the World Trade Organisation (WTO) in 2001. The official statistics suggest that the average annual wage in the manufacturing sector was only RMB 9,774 (USD$100) at that time. Yet at the same time, life expectancy had already reached 72.61 years and adult literacy was over 90 percent by 2001, a rare human development achievement for the level of economic development at that time as measured by standard GDP. That achievement was due to the radical policies of redirecting public health and education resources to the rural sector and the less privileged in the urban sector, which largely took place during the pre-reform period. What is at stake is not the absolute level of labour costs but rather the cost-effectiveness of labour, or the cost of labour for a given output level. In other words, businesses do not just compare nominal wages across countries and choose the lowest wages, they also take account of the productivity of labour, which, along with the wage, determine the labour cost per unit of output value. Productivity can be affected by many factors, including labour quality, physical infrastructure, economies of agglomeration, and technology, in all of which India is currently lagging behind China.

The quality of labour, which can be roughly estimated by health and education indicators, contributes significantly to labour productivity and cost-effectiveness, which matters to businesses. Historical data suggest that the gap between India and China started decades prior to the reform era and has widened until today. India’s starting life expectancy at the time of independence was comparable to China’s in 1950 (around 30 years), but China’s life expectancy surpassed that of India as early as the 1960s, and by the time China entered the economic reform period in the 1980s, it had achieved a life expectancy of 64 years—10 years more than what India had achieved at that time (54 years). Similarly, for adult literacy rate, the gap between India and China started in the pre-reform period and has continued until the present (77.7 percent versus 97.2 percent in 2022). India’s life expectancy and literacy rate today has not even reached China’s 2001 figures.

This persistent gap largely explains why cellphone production in India right now still has a high defect rate of around 50 percent, much higher than in Chinese factories, and higher than what global capital can accept. It also explains why, despite its annual manufacturing wage experiencing an eight-fold increase from 2001 to 2021, and the hourly wage a three-fold increase from 2005 to 2016—making wages in China far higher than manufacturing competitors in Latin America and Southeast Asia—China is still the largest manufacturing country in the world, taking a total share of 28.7 percent of global manufacturing output.

In addition to cost-effective labour, a potential manufacturing hub must also have well-maintained physical infrastructure such as highways and railroads to ensure materials can be transported safely, cost-effectively, and in a timely manner. Today only 5 percent of India’s roads are highways, and road congestion is a major problem. Although the railroad infrastructure building in India can be traced back to colonial times, much of it is outdated and cannot satisfy the needs of expanding industries.

Another disadvantage for India is the lack of a comprehensive industrial system which prevents India from achieving economies of agglomeration, a term used by economists to describe cross-industry economies of scale. This means that smart phone manufacturers do not have access to components cost-effectively from nearby locations, but instead might have to import those intermediate inputs from abroad. This lack of the backward linkages adds additional uncertainty as well as costs for businesses.

All of the abovementioned disadvantages will take great effort to address, and India still has a long way to go.

Economic versus Political Considerations

The above analysis points to one conclusion: if it is a purely economic decision, one should expect TNCs to continue manufacturing in China to take advantage of its labour cost-effectiveness, instead of bearing the risks of a premature shift to India. Nevertheless, Apple recently announced that it is moving production away from mainland China—where currently 95 percent of all iPhone products are manufactured—with plans to expand operations in India, where 25 percent of iPhones will be assembled by 2025.

It appears that this is a move based on political considerations. Market forces alone cannot make such a shift work, and instead, many non-market interventions will be required to rapidly prepare India for this role. This will include not only policies to directly support the manufacturing industry, but also policies to improve labour productivity, such as investment in public health, education, and physical infrastructure. Investment of this kind, as argued by the renowned Indian economist and philosopher Amartya Sen, would require strong state participation and should not be left solely to the ‘invisible hand’ of the market.

Based on historical experience, such a big shift could potentially enable India to rapidly transform its economy towards industrialisation, a path that was used by South Korea and Taiwan during the Cold War. There is striking similarity in terms of their motivations. During the Cold War, the aim was to compete with socialist North Korea and socialist mainland China. The West supported that approach by supplying South Korea and Taiwan with capital and technology and integrated them into the global trade arrangement, starting with the two economies engaging in low value-added manufacturing activities. Land reform was even tolerated by the West in South Korea and Taiwan at that time to enhance incentives and improve productivity. It was a rare time when countries in geopolitically strategic positions had a remarkably wide domestic policy space, as well as material support from the developed countries to launch industrialisation. Later South Korea proactively “defied” its comparative advantage, as described by economist Ha-Joon Chang, upgrading to producing higher value-added electronic products and climbing up the ladder of the global value chain.

If India wants to follow the East Asian development path, that is an opportunity it can seize. Acknowledging that shifting to India is driven by geopolitical considerations, India should use its strategic position to bargain for more capital and technological support to enhance its manufacturing capacity as well as to collaborate with other countries to invest in its human capital development. However, the temptation for India is to passively follow the Western doctrine of comparative advantage and stay at the lower position of the global value chain. What India should do in the intermediate term is to proactively implement industrial policies to achieve industrial upgrading as quickly as possible.

Prospect for Labour

Most analyses of India’s rise as a potential manufacturing hub have focused on the interest of capital as a priority, weighing whether it makes sense for businesses to shift production and endure short-run risks and possible losses. At the other end of the spectrum, it should be noted that once the TNCs are able to diversify their manufacturing sites, they will have even higher leverage to bargain down wages for workers in any specific site. India’s status as the most populous country with a much younger labour force attracts foreign capital precisely because the very existence of a large reserve army of labourers (i.e., the majority unemployed or underemployed who are willing to jump to a position for a subsistence wage) weakens labour’s bargaining power. In 2021, India’s average monthly wage amounted to $422 while its average minimum wage was $95, much lower than in Southeast Asian markets. Not surprisingly, women’s wage compensation, if they earn wages at all, is even less. For instance, a female industrial worker made INR 382 per day on average in 2019, which was only 87 percent of what her male counterparts earned.

As long as capitalism remains the dominant operating economic system, the race-to-the-bottom strategy domestically and internationally will tend to be prevalent, and the textbook issues of labour exploitation and ecological destruction can be expected to persist for a long time, despite the aggregate employment potential and GDP growth potential being attractive for a while. The most recent legislation reforms in favour of Apple and Foxconn over the claims of Indian labour in the state of Karnataka allows the two companies to legally extend work-shifts from 9 hours to 12 hours and allows overtime hours to rise from 75 to 145 hours over a three-month period, suggesting that a new wave of labour struggles in India is just beginning.

Ying Chen, Ph.D., is Assistant Professor of Economics at the New School for Social Research. She tweets @YingChenTNS. The author would like to thank Nishu Mehrish, PhD student at the New School for Social Research for her research assistance.

---

The views expressed in the article are solely those of the author(s) and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.

Image Credit: iStock/guirong hao

---