For a decade, India's economy has played the same hit song, stuck on repeat: The service sector – anchored by information technology – generates 50 percent of the nation's wealth. Meanwhile, manufacturing has been dismissed with a snort. India was too inefficient, too bureaucratic, too underdeveloped.

Now, that is changing.

Boosted by the country's growing appetite for global goods, companies ranging from Honda to Hewlett-Packard are bringing new assembly lines to India. Manufacturing grew 11.3 percent in the first quarter of this fiscal year, spurring the country's highest first- quarter growth this decade: 8.9 percent.

The old problems persist, and India is nowhere near ready to displace China as the world's factory floor. But in a nation where 250 million people live on less than $1 a day, it offers a hope that high tech cannot: that India may begin to spread its newfound prosperity beyond a small, urban middle class.

Here outside Chennai, amid a thicket of thatched-roof huts, two factories – one for Nokia and the other for Korean automaker Hyundai – suggest what is possible, even in a country short on power, pitted by potholes, and still under the economic sway of Karl Marx.

"Can manufacturing work in India?" asks Jukka Lehtelä, director of Nokia's India operations, as the footsteps of arriving workers rattle ceiling light fixtures. "Anyone who could see behind these walls would not ask that question."

While the scene outside is timeless India, with workers filing by wearing saris so bright they could be plugged into a light socket, behind these walls is something new: the whirring and clicking of clockwork cellphone construction. By design, the factory floor is organized with the same Scandinavian orderliness that characterizes every Nokia plant – from its domestic factory in Finland to others in China, Texas, and beyond.

It is at least a start. While manufacturing is 55 percent of China's gross domestic product, it is only about 17 percent of India's – so it has often been overlooked. "In the 1990s, we lost sight of manufacturing as a sector," says Ramesh Mangaleswaran of the Mumbai (Bombay) office of McKinsey & Co., an international consulting firm.

For one, the brightness of the service sector eclipsed manufacturing. But there was also a lack of will to put in the work needed to make manufacturing viable in India.

Indian-made goods were expensive because of high taxation – the legacy of India's bygone socialist era.

Likewise, the country undercut its advantage of low-cost labor with strict labor policies – such as one law that requires companies with more than 100 employees to get permission from the state government before laying off workers.

Lastly, India's roads and power grids were ill-equipped to handle the strain of a manufacturing economy, with its sorties of multiton trucks and a thirst for uninterrupted electricity.

By and large, the problems remain. There is progress, as the government amends the tax code and establishes special industrial zones with better infrastructure, tax breaks, and – in some cases – more flexible labor laws. But Chinese goods are still 30 percent cheaper, and China still has seven times the highway miles, by some calculations.

The great incentive nowadays is the Indian market itself. Domestic demand, not exports, is the real engine behind India's growth.

It is the world's fastest-growing cellphone market, with more than 1 million phones sold every week. By 2016, auto sales here could more than quadruple, to $145 billion, the government estimates. And Indians will buy 5.6 million computers this fiscal year – 1 million more than last fiscal year, according to Dell Computers.

So it is no mystery why Samsung and Motorola, Dell, and Hewlett-Packard are setting up Indian factories. For its part, Nokia considered building a plant here in 1995 and again in 2001. But the time wasn't right until 2004.

Page: 1 | 2 | 3 | 4