2024-09-04 - Wealth

India's Industrial Dream Crumbling?

Since Narendra Modi made his ambitious debut in Indian politics in 2014, he came with grandiose plans to revolutionize the country’s manufacturing sector. His vision was clear: to propel manufacturing's share of India’s GDP to over 25% and to create 100 million new jobs, serving as a robust engine for economic growth. Fast forward to 2023, and the situation paints a stark contrast to the optimistic proclamations; the contribution of manufacturing to the GDP hasn't just stagnated—it has decreased from over 18% a decade ago to approximately 15% today. Even more alarming, the number of workers in the sector has dwindled by over 15 million, resulting in a dire situation where India's share of global exports pales in comparison to countries like Singapore.

This predicament raises a glaring question: what has led India, a nation seemingly focused on bolstering its manufacturing, to descend into a state of regression rather than progress? Some individuals hastily attribute this decline to Indian workers, attributing it to laziness and a lackadaisical attitude towards work. This perspective is fundamentally flawed. The truth is, when Indian workers engage, their commitment and thirst for productivity rival any global standard. Reports indicate that they often clock in extensive overtime and labor diligently, showcasing an admirable work ethic. The stagnation of Indian manufacturing stems from much deeper issues—primarily the unresolved challenge of capital accumulation, specifically relating to foreign currency reserves.

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Consider, for instance, India's efforts to lure Tesla, a titan in the electric vehicle market, to establish manufacturing plants within its borders. The expectation was that this would ignite India’s own burgeoning electric vehicle sector. However, the country’s industrial base is alarmingly underdeveloped, to the point where even fundamental components like batteries and seats must be imported. Consequently, as Tesla ramps up production, India’s foreign currency reserves face an unsustainable drain, akin to a dam bursting under relentless pressure.

To add to this complexity, Tesla’s investment in India is not rooted in altruism. When profits flow from their operations, the expectation is to convert the resulting revenues back into US dollars, subsequently repatriating them to the United States. If India's financial systems cannot provide the necessary dollar amounts when the time comes, this partnership could quickly turn into a financial quagmire, driving away foreign investments and tarnishing India’s international standing.

An in-depth examination of India’s foreign currency reserves reveals an intricate and troubling landscape. At first glance, India ranks fourth in the world regarding currency reserves, exuding an air of financial robustness. However, beneath this facade lies a convoluted situation. In stark contrast to many countries that predominantly hold stable assets such as US dollars or euros—accounting for up to 70% of their reserves—India diverges by heavily investing in gold, spending hundreds of billions on this commodity, while also counting Special Drawing Rights (SDRs) from the International Monetary Fund within its reserves. This imbalance resembles a personal financial mishap where someone mistakenly includes a credit line allowance as actual savings, greatly inflating their perceived financial security.

Furthermore, the multi-hundred-billion dollar foreign reserves India boasts might seem significant, yet they are merely a drop in the ocean against an insatiable tide of demands on the financial front. Being a resource-poor nation, India’s dependance on imported oil is staggering, with its oil import levels even exceeding those of larger economies like China. The vulnerability of India’s fragile industrial framework necessitates imports for virtually every product, which places the country in a precarious trade deficit situation. This annual trade shortfall consumes over $200 billion, while the national debt looms around $7 trillion, demanding upwards of $100 billion annually just in interest payments.

In juxtaposition, while the United States carries a staggering $36 trillion national debt, the scenarios of the two nations are worlds apart. The U.S., buoyed by the dollar’s global supremacy, can "extract" funds from countries worldwide with little concern for repayment. In contrast, India's rupee possesses no such stature on the international stage and is largely ignored. Moreover, when it comes to actual foreign debt obligations, India must repay in currency reserves. Should these reserves dwindle to critical levels, the country faces dire circumstances. The choices would be painful: whether to follow South Korea's 1998 example, selling off vital national assets like Samsung, or succumb to a fate similar to that of Sri Lanka or Zimbabwe, grappling with the harsh reality of national bankruptcy. None of these outcomes are tenable for India.

In a desperate bid to carve out a path through its foreign exchange maze, the Indian government has resorted to a plethora of strategies, displaying a mix of ingenuity and reckless abandon. On one hand, it adopts tactics resembling "draining the pond to catch fish." While a significant portion of the population struggles with food security—over 200 million Indians face hunger—the government disregards these pressing issues and exports a staggering one-seventh of its rice at bargain prices, capturing a 40% share of the world rice market.

On the other hand, the Indian government has concentrated its efforts on overseas labor, tapping into the potential of remittances from a significant diaspora. By 2022, the number of Indian workers abroad surged past 32 million, making it roughly one in every 40 Indians engaged in labor overseas. This dependency on remittances underlines the fragile economic structure that India is operating within.

Additionally, India has taken an early stance on “de-dollarization,” yet this initiative is more about necessity than a bold political maneuver against the United States. As dwindling dollar reserves pressure the nation, there was hope for direct trade with global partners using the rupee, only to be met with resistance. India's past financial indiscretions, marked by defaults and a lack of credibility, loom large over its attempts at establishing trust with other nations regarding its currency.

To mitigate foreign currency losses, Delhi has imposed mandates on foreign companies to increase their use of domestically produced components. Yet, this strategy is met with trepidation, as India’s manufacturing remains weak and unable to compete on an international level, frequently burdened with trade deficits of one to two hundred billion dollars. Investors attempting to establish a foothold often find themselves ensnared, with many withdrawing disillusioned after just a few years, leading to a scenario where India becomes a graveyard for foreign investment and a hindrance to its industrial aspirations—an unending cycle of failed attempts and missed opportunities.

Decades of attempts with seemingly diligent efforts have not led to the critical achievement of capital accumulation. As India continues to navigate its industrial ambitions, the road ahead remains littered with obstacles, leaving the path toward meaningful self-sufficiency and industrialization as uncertain as ever.