The masala Mittelstand

IF INDIA is to become “the next China”—a manufacturing powerhouse—it is taking its time about it. “We have to industrialise India, and as rapidly as possible,” said the country’s first prime minister, Jawaharlal Nehru, in 1951. Politicians have tried everything since, including Soviet-style planning. But India seems to prefer growing crops and selling services to making things you can drop on your foot.

Manufacturing is still just 15% of output (see chart), far below Asian norms. India needs a big manufacturing base. No major country has grown rich without one and nothing else is likely to absorb the labour of the 250m youngsters set to reach working age in the next 15 years. But it can seem a remote prospect. In July power cuts plunged an area in which over 600m people live into darkness, reminding investors that India’s infrastructure is not wholly reliable. And workers boiled over at a car factory run by Maruti Suzuki. Almost 100 people were injured and the plant was torched. The charred body of a human-resources chief was found in the ashes.

Yet not all is farce and tragedy. Take Pune in west India, a booming industrial hub that has won the steely hearts of Germany’s car firms. Inside a $700m Volkswagen plant on the city’s outskirts, laser-wielding robots test car frames’ dimensions and a giant conveyor belt slips by, with sprung-wood surfaces to protect workers’ knees. It is “probably the cheapest factory we have worldwide”, says John Chacko, VW’s boss in India. In time it could become an export hub. Nearby, in the distance it takes a Polo to get to 60mph, is a plant owned by Mercedes-Benz.

Both German firms were attracted by (fairly) reliable power and access to land but also Pune’s engineering colleges and tradition of manufacturing. “It is a hub for auto-suppliers,” says Peter Honegg, Mercedes’s boss. Smaller firms are arriving too. Zubin Kabraji, of the Indo-German chamber of commerce, says Pune hosts 262 German companies, up from 130-odd in 2008.

The foreign influx is not limited to Germans; and local suppliers benefit regardless. Three-quarters of VW’s parts are bought locally. Some foreigners are not really manufacturing but rather assembling imported parts to get around Indian customs duties. Still they use some Indian suppliers too—30-40% of Mercedes’s components are local. Indian champions are also prospering. Tata, a conglomerate, has been in Pune for decades and has a new plant assembling Land Rover cars. Bharat Forge, with $1.3 billion of sales, makes car parts, with 70% going abroad. Its boss, B.N. Kalyani, says local entrepreneurs are “doing a damn good job”.

Industrial hotspots such as Pune, Chennai and the state of Gujarat are not the only evidence that manufacturing has momentum. India’s share of global merchandise exports has doubled to 1.5% since 2000 (but is still far below China’s 11%).

The next China, or more of the same?

Exports have shifted towards engineering products, which now make up a fifth of the total. Indian firms have become good at flogging everything from motorbikes to spare parts, particularly to Africa and the Middle East. And most have got fighting fit. Anil Gupta, the boss of Havells, a Noida-headquartered firm which makes electrical equipment, recalls visiting a vast Chinese factory in 2002: “It was a shock.” But now his firm has invested heavily and, he says, can hold its own.

Indian labour may even have grown relatively cheaper. A 2010 study by America’s Bureau of Labour Statistics found that, at just under a dollar an hour, labour costs (including social-security costs and taxes) were similar to China’s and just 3% of American levels. Since the data were collected the rupee has fallen by a third against the renminbi and a fifth against the dollar, making things even cheaper. And those data only included elite workers in the “official” sector—an unskilled labourer might get four dollars a day. Unadjusted for productivity, Indian labour is dirt cheap.

Of course scarce land, red tape, poor education and infrastructure, and onerous labour laws partly offset this. But optimists can point to a government policy, in place since late 2011, to create giant new special economic zones (SEZs) that deal with these problems.

Japan, then South Korea, then China. Will India become the next workshop of the world? It is far too soon to crack open the champagne. For one thing, the state seems incapable of resolving bottlenecks, even through SEZs. Some 300km north-west of Pune lies Silvassa, part of a enclave governed by Portugal until 1954. It has long been lavished with tax breaks to attract industry and is controlled by the central government. Yet today it is notable for derelict factories and its trade selling grog to Gujarat, a dry state next door.

What is happening in Pune is more sophisticated than epic feats of metal-bashing. While VW’s plant is more labour-intensive than its German equivalent, it still relies more on computers than humans. Local firms, such as Bharat Forge, have been shedding unskilled labour, investing in technology and building brands and distribution overseas. “Indian firms that are technology-focused are extremely successful,” says Mr Kalyani. But “commodity manufacturing is unsuccessful. It is the opposite of China…We have archaic labour laws. Nobody in their right mind is going to set up a plant employing 10,000 people.” His ambition is to make his firm another Siemens or General Electric.

This fits a pattern. Even as high-end engineering boomed, manufacturing jobs dropped slightly between 2004 and 2010, to 50m. Basic industries that soak up labour, such as textiles and leathers, are in relative decline. India is at last getting good at making things—but not in quite the way its founding fathers envisioned. Visitors to the country’s industrial centres, such as Pune, can only marvel at the great leaps Indian firms and entrepreneurs are making. And worry about the consequences of another decade in which the country struggles to create jobs.