Tuesday, August 11, 2015

India’s (and Nepal’s) problem with manufacturing sector

The problem with India’s (can relate to Nepal’s as well) manufacturing sector explained by The Economist:

  1. India opened up product market to competition (including imports), but left its factor market (land, labor and capital) unreformed.
  2. Companies needed to ensure economies of scale in production to effectively compete in the global market. But, high cost of capital, inflation and inefficient court clearance (of recovery of bad loans) led to high production costs.
  3. Complex laws make it difficult to acquire farmland for industry or infrastructure.
  4. Dated labor laws burden businesses with cumbersome (disincentivizing) regulations and processes. Hiring is easy, but firing is very difficult (even when the company’s revenue/profit dips south). Unruly trade unionism is a major concern.
  5. Hence, most firms and economic activities are capital-light (IT services, services sector, etc).

With the ‘Make in India’ initiative, one of the signature campaigns of PM Modi, some positive signs are emerging: Mahindra Aerospace, Foxconn, Micromax, Ford, BMW, Mercedes, etc are opening new factories.

For Nepal, it has been disappointing ride all along as investment and share of manufacturing in GDP are both shrinking (the above reasons apply, plus lack of adequate supply of electricity, lack of skilled workforce, and political instability).