Indian setup manufacturing in China

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Mumbai, India (CNN) – After years of growing at a breakneck speed of around 9%, the Indian economy is running out of steam and the manufacturing sector is suffering.

External problems like the crisis in Europe, plus domestic troubles like inflation, are hurting manufacturers, forcing some to shut up shop, scale back – or in some cases, start manufacturing in China.

Ashish Saraf is CFO of Technocraft Industries. His factory outside Mumbai makes yarn, cotton, clothes and engineering equipment. Almost everything is exported so Saraf keeps a close eye on exchange rates, watching as the rupee slid about 25% versus the dollar over the past year.

Usually, when the rupee weakens, Indian exports become cheaper, so buyers overseas order more. But that’s not the case for Saraf because, he explains, the European crisis has completely wiped out demand for his goods.

“Last year was one of the worst years we’ve ever had in the 15 years of existence in this industry, especially in the spinning sector, where every hour of production counts,” Saraf told CNN’s Mallika Kapur. “We had to actually cut down complete shifts for a whole month to cope with the slow demand. We could not sell what we were producing.”

Faced with similar problems, manufacturing companies across India are shutting down or scaling back.

Narendra Thakkar is finding it hard to staff his garment manufacturing unit. He says laborers want higher wages, because they’re paying more for everything from food to fuel. And if they don’t get that higher wage, they’re going back to their villages where the cost of living is cheaper.

Inflation is also driving up the cost of raw materials at a time when demand is slow.

At full capacity, Thakkar’s 50 tailors operating 50 machines could produce 500 pieces a day. Now, with just 21 tailors, they produce half that. Manufacturing activity – considered the main engine for growth in India – contracted in the first quarter of this year against a 7% rise last year.

“It’s because investments have stopped,” said Satish Jamdar, of the Confederation of Indian Industry. “Investments in long-term projects have stopped. Investments have been a little slow. We need to fuel this, give some impetus to infrastructure.

“I have seen all great nations that came up and started growing; in the beginning, initial development came from spending on infrastructure. Then manufacturing kicks in, services kick in. That’s what we require.”

The slowdown in manufacturing is affecting overall growth and India’s economy is currently growing at its slowest in almost a decade. Disillusioned with the state of the economy, Saraf set up a manufacturing facility in China, where he makes engineering equipment.

“In China, the benefit primarily was the raw material cost,” he said. “The overall cost of production in China is much lower. Even now, the cost differential between here and China is around 10 to 15%. And then you have the labor cost difference. Once you add in all the productivity etc. the labor cost in China is definitely lower.”

He says it was surprisingly easy to set up his factory there.

“In India you have a lot of hidden costs,” he explained. “In China they welcome foreign investment, they welcome industries to be set up there. So setting up was relatively easy and quite fast so you also save on the time. The faster you start up the faster is your recovery on investment.”

But what’s good for the bottom line of Indian entrepreneurs isn’t necessarily beneficial for India, according to Jamdar.

“What worries me is the flight of capital or investment or evn thinking, which for a nation of huge potential, I find it strange to be in this situation,” Jamdar said.

“All of us have to, as people who are involved and responsible, get down to the business of building it back because it is possible.”