One benefit of being an underachiever is that you have a lot of potential.
According to an article in the McKinsey Quarterly, the manufacturing sector of India knows that all too well. The authors point out that India’s “exports are growing” but that “its manufacturing sector generates just 16% of India’s GDP—much less than the 55% from services.”
As a result, people who invest in Indian factories often find themselves disappointed. “A majority of India’s largest manufacturers don’t return their cost of capital, a factor that dampens investment in the sector and makes it less attractive than its counterparts in competing economies,” the article explains. “If India’s manufacturing sector realized its full potential, it could generate 25% to 30% of GDP by 2025, thus propelling the country into the manufacturing big leagues.”
This is, most broadly, a problem of management, a topic about which Peter Drucker had a few things to say. But it’s also more narrowly about figuring out what sort of productivity would be best for today’s India, given its capital resources.
Drucker saw great benefits to the industrialization of India—among them that it was eroding previous social boundaries. “In India, industrialization has begun to corrode the Hindu caste system,” Drucker observed in The New Society, which was first published in 1950. “Ritual restrictions on proximity and intercourse between castes simply cannot be maintained under factory conditions.”
But it had to be the right kind of industrialization—the kind that returned the cost of capital. In the 1960s, many experts “proclaimed that development is an automatic and direct function of the size of capital investment,” Drucker wrote. “But that is not productivity; it’s waste and incompetence.” Others seemed to “define productivity as whatever uses the most labor,” Drucker observed. “But that, too, is incompetence.”
The right way to think of productivity is as follows: “Productivity is whatever generates the highest overall yield from an economy’s resources of capital, labor, physical resources and time.”
In India’s case? As we’ve mentioned, Drucker felt cars, bikes, radios, and other products had a higher multiplier effect. And India has made great strides in these sectors. To that extent, Drucker would say India’s choice of investments of capital has become wiser. The next challenge is to manage that capital better.
Would you invest in India’s manufacturing sector? Why or why not?