Standing at its full height, India could rival China and perhaps someday surpass it as the manufacturing giant of the world. Right now, however, India’s failure to develop a strong local manufacturing sector has exposed it to many serious economic problems, one of which is a trade deficit with China. While India should be able to match China on labor costs, the former has lagged in developing the infrastructure that would allow manufacturing (and especially manufacturing based on foreign investment) to really take off.The failure is starting to hurt, as the WSJ reports:
India’s trade woes have become a serious economic threat for the nation. The country’s current account deficit—which measures the balance of trade with the world—was 4.5% of gross domestic product in the quarter that ended March 31, an all-time high. That has contributed to a sharp depreciation in the rupee and has put enormous pressure on India to attract foreign capital.
Throw in the rest of the economic obstacles India is facing, and it sheds some light on why incidents like this week’s massive power outages have occurred:
Inflation is persistent and economists expect it to tick up more this year. Spending on expensive energy subsidies is weighing down the treasury. And, as was on stark display this week when India suffered the world’s largest-ever electricity blackout—covering states inhabited by 680 million people—the country’s infrastructure is badly outdated and unable to meet the demands of a huge, emerging middle class.
The outages this week were just one example of critical shortcomings. Others include roads, port facilities and other infrastructure that can make or break a country with commercial and innovative potential. (The ability to buy or lease land is another problem.)India is right that Chinese protectionism plays a role in its trade gap. But the heads of government and commerce ministers would be better off thinking about how to make their nation a leading manufacturing company than worrying about Chinese protection. New Dehli can’t do much to affect the calculations of the inner sanctum of the PRC’s politburo; it can, however, make sure that manufacturing becomes, at least for a time, a major economic booster for India that both creates millions of jobs and raises living standards for the country’s poor.India’s leaders have before them a huge and historic opportunity. India could become the largest economy in the world in the not-too-distant future, but for that to happen, India’s politicians are going to have to raise their game. At this point, it’s not clear whether they can — or even if they really want to try.