India: Why is manufacturing cost higher in India when compared to China?

Answer by Balaji Viswanathan:

A number of my relatives run manufacturing plants in Tamil Nadu – a relatively developed state. My in-laws also have started recently importing  from China [replacing their Indian suppliers] and I will tell you why costs are higher than in China.
  1. Power availability: You start a plant and realize that power availability is not 24/7. In Coimbatore and other industrial places you get power for like 8 hours a day. That means the machinery lies idle for 16 hours and that wasted capacity adds to the cost.
  2. Cost of power: In India, we subsidize the power to farmers so much [farmers are a huge political base to regional parties] that the electricity companies either have to go bankrupt or charge huge amount for industries. Electricity cost is often higher than even in some developed countries.
  3. Cost of labour: Getting good factory labour in places like Tamil Nadu has become extremely hard. The skilled ones are already in high paying industries. The unskilled ones are too hard to deal with. When we get labour from the north, they often move out without much notice [go to Diwali vacation and never return]. Skill building is very lacking. If you pay $250, the quality of labour you get in China is likely higher than what you get in India.
  4. Cost of transportation: Given the poor roads, a shipment from India's north can take a week or more to reach India's south. Sometimes it is quicker and cheaper to actually get shipment from Shenzhen than Kolkata. Time is money and all those delays add to your cost. If I could get something in 2 days, I could sell it immediately rather than wait 2 months to sell it [add up the interest costs].
  5. Bureaucracy: Starting a new plant or to add anything is very costly in time and money. You need to fill out a huge number of forms and grease a lot of palms just to do something legal & useful. Shipping across states is also very delayed [this is why industry is pushing for GST]. Unless most of the Indian laws – especially the one dealing with factories and labor – are thrown out, corruption, delays and inefficiencies will remain.
  6. Anti-large enterprises: India grew up in the mindset that large industries are bad. While many laws changed since 1991, some of our laws, especially in textiles,  are structured around small enterprises. Small businesses cannot have the scale to produce cheap and take on massive factories in China or Bangladesh. Thus, in the huge lucrative market of readymade garments, Bangladesh quickly took to #2 – leading to huge improvements in women development, while Indians are clinging on to outdated laws favoring small, cottage industries.
If India has to compete with China, we have to completely overhaul all the economic laws – taxes, labour, factories – we put in place since 1947. Otherwise we will continue to be costlier than Vietnam and Bangladesh.

India: Why is manufacturing cost higher in India when compared to China?


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