The Indian economy is at a crossroads. Despite advantages like a stable democratic, government and a large English speaking population, the country has lagged China in fulfilling its potential as a global manufacturing powerhouse.

In recent times, many Indian leaders have found it tough to fulfill the country’s economic potential. Prime Minister Narendra Modi has been trying to change that and his ‘Make in India’ initiative has gotten off to a good start and positively impacted its economy with tangible gains.

Make in India

Since the program was launched ‘Make in India’ has boosted the volume and quality of foreign direct investment (FDI) into India. FDI flows increased by more than 70 percent in 2015 to reach a record level of $59 billion. The program’s success is powered by government focus on the easing of bureaucratic barriers that prevented foreign businesses from moving into India.

Policy measures, promoted by the Modi government have made it easier for firms to set up shop in India, and have changed perceptions of the government to being a ‘facilitator’ rather than a ‘regulator’. I have been speaking to global business leaders about India’s economic prospects and these conversations make clear that most leaders are confident about India’s path forward and the government’s collaborative approach to business.

‘Make in India’ and the government’s business friendly attitude have played a key role in changing their pre-conceived notions about India and encouraging a new sense of optimism.

The Challenges

Despite this excellent start, the programme’s overall success will depend on how India balances two crucial factors.

The first is the ongoing transformation within manufacturing. The industrial sector is changing at a speed far faster than predicted by any experts, except for those writing science-fiction. Advancements in technology such as artificial intelligence, machine learning and robotics are disrupting factory floors and evolving the way they are run and managed.

Robotic welders work on the bodies of 2016 Nissan Altima vehicles at the company’s manufacturing plant in Mississippi, U.S. (Photographer: Daniel Acker/Bloomberg)

India must pay close attention to developments in automation and the use of data analytics. According to some estimates, manufacturers can cut product development and assembly costs by as much as 50 percent and save up to 7 percent of working capital by integrating big data into their operations.

As the use of robotics becomes an increasingly critical part to manufacturing, location becomes less important. Consequently India must develop a unique proposition to attract global manufacturers. Simply relying upon policy changes and a large pool of workers will not work indefinitely.

Secondly, Chinese competition remains strong and active. Beijing’s firm grip on global manufacturing has lasted decades, and it plans on defending its leadership position. Although China’s manufacturing success stemmed from it being a low-cost hub, it has been climbing rapidly up the value chain.

China is forecast to become the world’s largest user of industrial robots by 2017, with an estimated 430,000 robots expected to come online. These strategic actions are intended to help counter rising labour costs and foreign competition, in order to maintain its position as a manufacturing hub of choice.

Automation is likely to increase productivity but will also render some jobs redundant. India will have to find the balance between incorporating innovations into its manufacturing facilities, with its need to create a substantial amount of new jobs. Over the next 15 years, India will have the world’s largest workforce, with 1 million people joining the already 500 million-strong pool every year.

These labour concerns are further complicated because agriculture, traditionally one of the biggest sectors of the Indian economy, has been shedding jobs. According to the National Sample Survey Organisation, 16 million people have left the agriculture sector since 2000. Urbanization and the success of ‘Make in India’ is leading increasing numbers of Indians to seek a better life working on a factory floor, than in the fields of a farm.

In response, the government has set clear goals for the manufacturing sector and the ‘Make in India’ initiative to create 100 million new jobs by 2022. If this can be achieved, it would absorb a third of the 300 million people expected to join the labour market by 2040.

These goals however may prove to be highly aspirational. Between 2010 and 2014, India created 4 million manufacturing jobs. At that rate of growth, the sector would only produce 8 million more jobs by 2022 — far below the 100 million target.

The Opportunities

India has a huge opportunity to shape its future, but first it must fix its skills gap. The country ranks 105th on the World Economic Forum’s Human Capital Index, behind all other BRICS countries (an acronym for some of the world’s fastest growing emerging economies: Brazil, Russia, India, China and South Africa) and even its South Asian neighbours Bangladesh and Bhutan.

The ongoing transformation in the sector presents a tremendous opportunity to rapidly educate its workforce on the skills it needs to compete. India can incorporate the requirements of future jobs into educational and vocational systems; to skill and reskill workers for new forms of technology and connect workers and certification programmes with regional, state, national and international markets. Armed with the correct skills India’s youth population and growing pool of workers can become India’s biggest advantage over its competitors.

Improvements to India’s basic infrastructure will also be critical to the long-term success of ‘Make in India’ India’s cost of logistics constitutes 13-14 percent of GDP, much higher than the average developed economy of 7-8 percent. This is largely due to over-dependence on road freight and poor connectivity between key industrial hubs.

To date, Modi’s government has demonstrated that it understands this challenge. There are five major industrial corridors that are seeing tremendous investments in its infrastructure. Some of these projects, such as the Delhi-Mumbai Industrial Corridor, have attracted billions of dollars in foreign investment. This public-private partnership model can help boost productivity and improve India’s manufacturing sector even further.

This month, India will be hosting the World Economic Forum when the very underpinnings of global leadership in manufacturing are rapidly changing. It is clear that labour costs and arbitrage will not be the primary drivers of the sector for much longer. Policymakers need to determine how to catapult India to a leadership position in manufacturing, with a sector that incorporates both the traditional labour intensive manufacturing segments, as well as the new and fast growing segments that rely upon technology and automation to increase productivity.

India does not confront these issues alone. Every single country that has a large manufacturing sector is dealing with their own approach and solution to these structural changes. Our ongoing work with the World Economic Forum includes evaluations of many individual countries to assess their readiness to take advantage of modern technological advantages within their own industrial sectors.

For India, a ‘Make in India’ programme that is mindful of the future and accounts for the disruptive and technological changes on the horizon will help the country realise its dream of leading global manufacturing.

As a co-chair at the WEF India Economic Summit, I’m looking forward to discussing these challenges and opportunities with leaders in government and business. It is truly an exciting time to exchange ideas around how this great country’s economic ambitions can become a reality.

(Johan Aurik is the Managing Partner and Chairman of the Board of AT Kearney. He is one of the six co-chairs at the WEF’s India Economic Summit 2016)

Source: BloombergQuint