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Large scale job creation strategy needs focus on low-end manufacturing

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Shashank Goyal
IIM-A alumnus, Software Sales Professional, Writes about business, economy and politics; Passionate about numbers, facts and analysis Tweets @shashankgoyal01

India is approaching a huge window of opportunity in the form of its “demographic dividend”. From 2020 to 2040, India will have a large and growing section of the population in “working age” (15 yrs to 60 yrs) giving it a bigger workforce than China’s. Deploying this large young workforce in productive areas could potentially create huge economic output in the long run.

One of the immediately available low hanging fruit with quick results is in low-end manufacturing like apparel, footwear, and leather. Currently, China has a huge 40% market share in apparel exports. India, Bangladesh, and Vietnam appear in a distant 3% to 5% range

                                                                                Source: UN Comtrade data

As per most industry reports though, due to rising labour costs, China is slowly moving away from apparel industry and shifting its focus to high-end manufacturing. With China vacating this space, a huge opportunity is up for grabs. India already has many strategic benefits which could be leveraged to quickly grow in this space. To begin with, labour cost in India is less than one-third of that in China.

                                                       Source: Federation of Indian Chambers of Commerce and Industry (FICCI)

Secondly, the raw material is easily available locally within India. India is world’s second largest cotton producer and no import would be needed. Synthetic textiles are also manufactured locally by some of India’s well-known business houses like Ambani (Reliance), Birla (Grasim) and Wadia (Bombay Dyeing). Today, most of it is exported as raw material to China which converts it into apparel and then exports the final value-added product. Local availability of cotton and synthetic textiles, coupled with low labour cost offers a huge advantage for apparel manufacturing in India which few other countries could match.

To add to it, more jobs can be created by investing in labour-intensive industries compared to automation driven industries. The data from NSSO 2012-13 indicates that every Rs. 1 lakh (INR 100k / $1.5k) investment in apparel manufacturing is expected to create 24 new jobs compared to only 0.3 in Automobiles or 0.1 in Steel

However, most of the current apparel manufacturing companies in India are unorganized and small in size. More than 90% of apparel firms have less than 50 workers. Only 15% apparel companies in China are this small. Large Chinese apparel firms employ about 10,000 employees, some going up to 30,000 employees too. Big global customers like Levi’s, H&M, GAP etc. are not likely to procure from such smaller companies in India.

Hence, a structured policy on creating large local manufacturers in sectors like leather, apparel & footwear could go a long way in creating high volume jobs in India.

In step 1, the government could invite big Indian textile companies like Bombay Dyeing, Grasim, Reliance etc. to take over these smaller units and merge them into large apparel manufacturing entities with economies of scale. Using the raw material which they already produce on their own, they could manufacture apparel in India and export large quantities to big global customers in US and EU. As indicated by industry reports, many US fashion companies are already looking for alternative sourcing destinations beyond China.

In step 2, the government could set up apparel manufacturing zones in populous regions of eastern India (UP, Bihar etc.), as they offer a large pool of human capital and the industry demands low skill level with low training cost. The government could also extend tax breaks for apparel industry as this will enable large-scale job creation.

In step 3, the government could also invite large apparel companies from China to start manufacturing in India. These companies already have an existing customer base. They could shift manufacturing to India and export from here. Benefits for China include low labour cost with easy raw material availability which keeps them competitive. Benefits for India include high volume job creation, higher economic activity and increased export revenue resulting in higher GDP. This would be a win-win for both Asian economies.

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Shashank Goyal
IIM-A alumnus, Software Sales Professional, Writes about business, economy and politics; Passionate about numbers, facts and analysis Tweets @shashankgoyal01

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