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Last Tuesday, Tata Motor’s Jaguar Land Rover (JLR) opened its first plant in Changshu, China. The luxury car-maker’s $1.78-billion Make-in-China push has come a little over a month after Tata Group chairman Cyrus Mistry confessed to be greatly encouraged under Prime Minister Narendra Modi’s leadership to join the “Make In India” programme that, he said, brings together industry and government for crafting a new future.

This was at the glittery launch of “Make in India” in Delhi where a galaxy of global corporate leaders ranging from Mukesh Ambani of Reliance Industries Ltd. to Lockheed Martin India CEO Phil Shaw in response to Mr. Modi’s call had pledged to invest and manufacture in India.

The pitch had its origin in the Prime Minister’s Independence Day speech when he invited global companies to pick India to locate factories, promising to replace red tape with red-carpet welcomes.

The jobs and incomes for Indians these factories would generate, he said, would in turn create the market for their output.

The goal the Modi government has set is to make India break into the top 50 in the World Bank’s ease of business index ranking from the current 134th position.

When companies such as Tata Motors choose where to locate a new factory, they consider a range of factors. But India fares badly on most of the counts. For instance, contract enforcement takes 1,420 days and going through the 12 procedures for starting business typically takes 27 days.

India’s chronic infrastructure and logistics deficit with inefficient transport networks makes it tough for manufacturing companies to achieve just-in-time production.

The Modi government has said it wants to radically de-bureaucratise, deregulate, change officers’ mindsets, cut paperwork and remove the notorious legal and infrastructure hurdles to starting and doing business in India. This is not the first time India is focussing on its manufacturing sector. In 2006, the UPA government put out a national strategy for manufacturing. It even dubbed 2006-15 as the “decade of manufacturing in India.” The five-year period of 2005-06 to 2009-10 was one of a smart 10 per cent plus growth for the manufacturing sector when several advantages — engineering skills, a growing domestic market, a raw material base and a large pool of skilled labour — trumped the vast barriers to doing business in India.

JLR’s China launch has set alarm bells ringing for the Modi government: “Make in India” will have to go quickly from being a statement of intent to real action on the ground. Markets across Indian towns and cities that are flooded with Chinese products, more so around festivals such as Deepavali, are grim reminders of how Made-in-China has come to dominate homes and offices. From furniture and gadgets to industrial equipment, India is importing almost all products from its neighbour, even yarn for saris. It is estimated that over 99 per cent of Bangalore silk saris are being made with Chinese silk yarn.

As a result, the rapidly growing bilateral trade between the two neighbours is tilting heavily in China’s favour, at a rate that India has termed unsustainable. Bilateral trade crossed $65 billion in 2013, but while India exported $15 billion worth of goods to China, but imported $51 bn. The quality of trade also goes against India. India exports raw materials such as iron ore but imports manufactured goods.

In pursuit of its reforms agenda of 1979, China has followed a more-exports-at-any-cost policy to boost its economy. The Chinese government’s support to manufacturing in the form of affordable cost of funds, cheap inputs and world-class infrastructure gives it an advantage over Indian manufacturers. The Confederation of Indian Industry estimates that Chinese manufacturing as a result enjoys a cost advantage of about 10 per cent over Indian manufacturing.

A fallout of which is dumping of products on big markets like India. To protect domestic manufacturers, India has been imposing an anti-dumping duty on 159 products — ranging from chemicals, petrochemicals, pharmaceutical, steel, fibres and consumer goods — imported from China since 1992.

The spurt in factory imports from China has coincided with a sharp slide in India’s manufacturing sector despite the UPA government’s efforts to push the sector.

Manufacturing output grew barely 1 per cent in 2012-13. In 2013-14, factory output contracted (-) 0.7 per cent. The share of the jobs-creating sector in the GDP has declined to 14.9 per cent in 2013-14 from the peak level of 16.2 per cent in 2009-10.

India’s advantage

But there is hope still. A new index of manufacturing costs, including productivity-adjusted wages, electricity, natural gas and currency movements, created by the Boston Consulting Group (BCG) of the world’s 25 biggest exporters shows China’s traditional cost advantage is now under pressure denting its attractiveness. Under pressure from the U.S., China has had to appreciate its currency by 30 per cent since 2006, which is eroding its exports’ cost competitiveness. Just-in data from the International Monetary Fund show that China is no longer the largest trade surplus economy in the world.

Therein lies an opportunity “Make in India” must tap. India’s labour costs are among the lowest in the world. According to the U.S. Bureau of Labor Statistics, average labour compensation (including pay, benefits, social insurance, and taxes) in India’s organised manufacturing sector increased only marginally, from $0.68 an hour in 1999 to $1.50 an hour currently. The average compensation in China’s manufacturing sector in contrast rose 20 percent year-on-year in the same period to $3 an hour.

Besides, the cost competitiveness, India boasts a nearly 500-million-strong labour force comprising unskilled workers and English-speaking scientists, researchers, and engineers, making it a potential destination for cost-effective research and development-oriented manufacturing.

Recent sporadic instances of the odd Chinese manufacturer setting up shop in India and a few Indian companies moving production bases back home from China are encouraging. Havells, Godrej, Micromax and auto-components maker Bosch are amongst a handful of companies that have recently moved back to India some part of their manufacturing or outsourcing in China owing to currency, labour and other cost advantages.

As Chinese factories move up the value-chain to hi-tech manufacturing, opportunities would open up for Indian entrepreneurs but they are up against stiff competition. On the BCG ranking, however, several countries, including the U.S. and Mexico, are better poised and ranked above India as of now to take gain from China’s loss of competitiveness. The coming together of smart entrepreneurs, employees, infrastructure and know-how could overtime become a durable advantage, as had happened in China’s case.