How India can compete in labour-intensive manufacturing

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How India can compete in labour-intensive manufacturing

The Economist | September 26, 2024

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The share of Indians who work in manufacturing is lower than in comparable countries, at 11%, and has not much budged for years. Exports of textiles and garments, one of the biggest sub-sectors, have actually fallen in value over a decade. Some economists think the time when India could develop through labour-intensive manufacturing of this sort has passed. Yet the achievements and challenges of somes of the superstars exporters suggests that there are still lots of ways to help such firms grow.

India’s clothing and textile industry is the third-largest sector by employment, after farming and construction. Yet only a fraction of its 45m workers labour in the formal industry, meaning for firms that are registered and pay tax. India’s textile and garments industry that, as a whole, exports far less than it could.

For some the explanation is poor education in India, which has left workers short of skills.  Weak infrastructure and insurance markets also get blamed. Instead three things hold India back. The first are labour laws. India’s Factories Act makes it next to impossible for firms with more than 100-300 employees (depending on the state) to fire workers. That makes them risk-averse, which affects how large they grow.  The second thing limiting India is its trade restrictions. America revoked India’s duty-free status in 2019 because Donald Trump deemed India too protectionist. The EU puts tariffs of 10-12% on imports of clothing from India, while maintaining trade agreements with Bangladesh and Vietnam. The third big barrier is that even manufacturers who are eager to expand can find it difficult to persuade Indian workers to leave farms and join factories full time.  As a result of all this, workers are some 20-30% more productive in Bangladesh than in India. As for Vietnam, another competitor, it has higher wages but also more business-friendly rules and better access to big Western markets.

What can be done? India’s government seems to understand the issues, but politics gets in the way. Amended labour laws were passed a few years ago. But their implementation has stalled at the state level. In any case, say firms, the reforms have not tackled their biggest concerns. Goodies that have supposedly been made available through the government’s flagship industrial-subsidy scheme (“production-linked incentives”, or PLIs) are “too hard to get”.

2 key takeaways from the article

1. The share of Indians who work in manufacturing is lower than in comparable countries, at 11%, and has not much budged for years. Exports of textiles and garments, one of the biggest sub-sectors, have actually fallen in value over a decade. Some economists think the time when India could develop through labour-intensive manufacturing of this sort has passed. India’s textile and garments industry that, as a whole, exports far less than it could.  Yet the achievements and challenges of somes of the superstars exporters suggests that there are still lots of ways to help such firms grow.
2. For some the explanation is poor education in India, which has left workers short of skills.  Weak infrastructure and insurance markets also get blamed. Instead three things hold India back: over protective labour laws, elimination of trade relaxation by USA and EU, and it is hard to persuade Indian workers to leave farms and join factories full time.

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Topics:  Global Economy, Manufacturing, India’s Textile & Garments Industry, Employment, Farms, Labor laws