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India”s Manufacturing Story: Today And Tomorrow

Posted on July 27, 2011 in Business and Economy

By Abhishek Nayyar:

We hear a lot about India’s successes in call centers, back office work, and services. But when it comes to manufacturing, India has lagged behind China. Poor infrastructure, bureaucratic red tape and restrictive labor laws have kept India’s manufacturing sector a backwater, while its services have turned red hot. Manufacturing holds the key to India’s gradual progression towards sustained GDP growth. The challenges that the future holds are many, especially since the manufacturing sector has failed to keep pace with the services sector, which, growing so spectacularly in the post-liberalization period, accounted for approximately 57% of the national GDP. Manufacturing accounts for less than 16% of the GDP in India. On a comparative scale (in other emerging countries), manufacturing accounts for 40% of GDP in Thailand, 34% of GDP in China, and 28% of GDP in Malaysia. It is important to keep this as context when we discuss the growth and development of the manufacturing sector in India.

The lack of adequate traction in manufacturing over the past two decades has had a negative impact on industrial job creation and has limited the sector’s global competitiveness. Enhanced focus on manufacturing could result in India becoming a key global manufacturing hub. In the recent past, China was clearly the preferred off-shoring destination for the US and other western manufacturing giants. But this mindset is changing and many leading companies in the West are now open to exploring India as an attractive, alternative destination. Talking of outsourcing, drug and pharmaceutical contract manufacturing and research are emerging as big opportunities for the Indian pharma sector. India faces an acute crisis of raw materials and components for electronics manufacturing. This has been one of the major factors for the country lagging behind on the manufacturing front. Today, the country imports about 80 per cent of its raw materials and components for the electronics industry, pushing the cost of manufacturing to a higher level and ultimately raise the cost of the end products. Indian manufacturers, therefore, fail to compete with the cheap products that are coming from China and flooding the market. If the Indian raw material and component base becomes strong, equipment manufacturers will enjoy the benefits of easy availability of components at competitive prices. This will save them from the hassles of importing components, which involve delays, high freight costs, customs clearance expenses and payment of customs duty.

As far as future of manufacturing sector is concerned, India is preparing to revamp its manufacturing setup, with the aim of emerging as a world class manufacturing hub. Realizing the potential in this arena, various companies catering to different sectors, such as consumer and industrial electronics, telecom equipment, computers and solar energy, are on their way to expanding their existing facilities in India, or are planning to set up new facilities to tap the huge opportunities within the country. These activities on the manufacturing front will also boost the growth of many other sectors like tools and equipment, test and measurement devices, SMT and through-hole machines, etc. India aims at increasing the share of manufacturing sector to around 26 percent of the GDP by 2020 from the 17 percent. India’s outward foreign direct investment (FDI) was $10.3 billion in 2008-09, and 16.2 billion in 2009-10. Nearly half of the outward investment is in manufacturing, and many projects are by small and medium size firms. Given that India’s Look East Policy has bolstered the economic partnership with East and South-east Asian countries, a substantial portion of the Indian FDI in this region will flowing into the manufacturing industries. With industrial output picking up, the manufacturing sector will be a major contributor to new employment and is likely to generate 27.95 million jobs by 2015, but the share of agriculture is expected to decline, according to a study. The study has projected 87.37 million new jobs by 2015, with 32% share held by the manufacturing sector, followed by trade and construction.

And within manufacturing, textiles, food and beverages, transport equipment, metals, leather and machinery are expected to contribute the most to employment generation. Manufacturing will have the highest employment potential because after agriculture it accounts for the largest share of jobs at 12.5% among different divisions of economic activity. A faster growth of employment in it, therefore, would mean addition of a large number of jobs. A 1% growth in employment in the manufacturing sector would mean over 6.25 lakh new jobs and suggested that if manufacturing was made to grow at 10% per annum, its employment potential will grow at over 5%. In India, FDI is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval. However, the government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB). FDI is now recognized as an important driver of growth in the country and India is expected to do better in this sector in future also.

The manufacturing workforce needs to have as much competitive spirit as a cricket team. The manufacturers need access to global markets and competitive capital, legal and regulatory processes must be stable, efficient and transparent and taxation must be globally competitive. To create a competitive playing field for manufacturing, governments also need to invest wisely in critical infrastructure — physical, social and digital. The government needs to be involved in building roads, ports and power grids infrastructure that manufacturers rely on but cannot build themselves. Indian manufacturing sector is still facing many hurdles like rise in the cost of raw material, infrastructure bottlenecks, environmental regulations and procedures, threat of Chinese imports, discriminatory excise duty on many items, import of second hand machinery, weak global demand, lack of technical skills and R&D activities, inadequate credit supply, and non uniformity of sales tax structure. By-passing all these hurdles will lead to reducing the cost of the end products, speeding up the time to market, and making Indian products competitive globally, in addition to saving precious foreign exchange for the nation.