Powering the Manufacturing Sector

Emphasising the importance of the manufacturing sector , Ajit Ranade, Chief Economist, Aditya Birla Group says that it is this sector that is the “real job creator” in an economy. “Any decline or contraction in its growth rate is a signal of an economic slowdown that calls for immediate corrective steps.”

This is especially important if one looks at the Reserve Bank of India (RBI) study in April 2012 on Foreign Direct Investment (FDI) inflows into different sectors. According to the study, the manufacturing sector is clearly emerging as the new favourite for overseas investors, with key segments such as “electricity and power generation” seeing renewed investor interest. News about such interest in the country’s manufacturing sector is also seconded by a joint report prepared by the US Council on Competitiveness and Deloitte. According to this report, “India ranks second in the world in context with the 2010 Global Manufacturing Competitiveness Index (GMCI) and will dominate the global manufacturing space in the years to come.”

India’s manufacturers have a golden chance to seize more of the global market. Rising domestic demand together with the multinationals’ desire to diversify their production to include low-cost plants in countries other than China

But as Ranade pointed out, the share of the manufacturing sector in the country’s GDP has stagnated at 15 to 16 per cent over the last decade and a major reason for this appears to be the lack of sufficient power. “Today, nearly one-third of all the power generated in the country is captive power, which has pushed up production costs to uneconomic levels.”

To make growth inclusive, the central government is laying intense focus on developing the manufacturing sector, having set itself a target to ensure that it reaches a 25 per cent share of the GDP by 2022, creating 100 million jobs in the process. In this context, five key objectives have been identified in the 12th Five Year Manufacturing Plan. In fact, a Planning Commission-constituted panel in its recommendations for the 12th Five Year Plan has said the aim should be to increase the rate of growth of the manufacturing sector more than 2-4 per cent compared to GDP growth to make the sector the engine of growth for the economy. It also sought to increase “depth” in manufacturing, with focus on the level of domestic value addition, enhanced global competitiveness through appropriate policy support and sustainability of growth, particularly with regard to the environment.

However, the problem here is one of compatibility of technology and labour skills. Experts agree that the focus should be on making skills development an essential part of the education system. Picking up on this point, Bhaskar Pramanik, Chairman, Microsoft Corporation (India), said that a major problem in this context was that “we were following medieval policy-making based on Stonehenge emotions, even though we possessed top-end technology.” To address this, the 12th Plan recommends various policy and programme initiatives for R&D, education and training, and technology development, purchase and acquisition, which is expected to push the sector to the global level.

Global consulting firm McKinsey noted in a recent report that India’s manufacturers have a golden chance to seize a larger share of the global market. Rising domestic demand together with the multinationals’ desire to diversify their production to include low-cost plants in countries other than China could help India’s manufacturing sector grow six-fold by 2025 to $1 trillion, while creating up to 90 million domestic jobs. The report lays out four key steps that the government needs to take to improve capital and labour productivity of the manufacturing sector including removing product market and ownership barriers, land market barriers, labour barriers, and most importantly improve infrastructure constraints.

This is a view echoed by leading financial information services company ICRA, which says in its report on the outlook for the Indian economy that a key issue facing industry and infrastructure projects in recent times has been acquisition of land. ICRA feels that an early passage of the Land Acquisition and Resettlement and Rehabilitation Bill will create regulatory clarity and enable a re-assessment of project viability.

India is a huge market from the consumer perspective and if we are competitive, investments will flow, Pramanik said, adding that the IT industry needed clear guidelines and policies from the government. “Stability in policies is essential and issues around taxation remain. What we need are stable policies, clear guidelines and less ambiguity. Already, other countries are attracting more investment from electronics and technology companies.”

Growth in the “real sector” has to speed up to meet its investment potential in years to come. From land acquisition to the environment to laws with retrospective impact, India appears to be losing out on its attraction as an investment destination

Stressing the need to boost domestic manufacturing capacity, Ravi Saxena, Additional Chief Secretary, Government of Gujarat, said that improvements in infrastructure should now percolate to rural areas. “This is necessary if we are to tap the vast consumer base that is emerging in these areas and for anyone to invest in the manufacturing sector to meet such demand, good infrastructure is a pre-condition.” Such investment, he said, was inevitable in the electronics manufacturing industry – for smartphones, laptops and other electronic gear – given the rising demand for such products. “If we do not act fast, we will miss a major opportunity and could see an import bill that may even match that of oil.”

He emphasised that the global electronics industry was one of the fastest growing in the world and demand in the Indian market was expected to touch $400 billion by 2020. Manufacturing has been recognised as the engine for economic growth and we must step up the share of domestic ICT and electronics hardware manufacturing. Conceding that the IT industry had made India one of the world’s fastest-growing major economies, he said it must “not be forgotten that the real issues lay with the real sector that was the manufacturing sector, which today accounts for barely 16 per cent of the country’s GDP.”

Citing the industry perspective, Ashok Kumar Goel, Vice Chairman and Managing Director, Essel Propack, said that there were huge concerns over power supply in most manufacturing industries. “Today, they find themselves outpriced in both the global and domestic markets, with the government subsidising power to the agriculture sector, there being lack of adequate fuel to run power plants and investors shying away due to concerns over government regulations.” While everyone agrees that employment creation is a necessity if we are to tap our demographic dividend, the government must be clear on the needs of the sectors that are going to generate it, he added. More importantly, the government has to decide on how to power this sector’s growth. The cycle of policy mismanagement that governs the country’s power sector comprises a burst of environmental vigilantism, lack of domestic fuel inputs and a poor pricing structure that starves those willing to pay for power, with the main victim being the manufacturing sector.

Agreeing with Goel, Ranade said that implicit in such policies being followed by the government was its subsidy structure. “It is time that the government got rid of both implicit and explicit subsidies.” He pointed out that the general focus has always been on explicit subsidies, which seek to address poverty, even though the quantum of implicit subsidies was much larger. About the agriculture sector, Ranade said that it was time “we took a good look at our low productivity and high input costs.”

Growth in the “real sector” has to speed up to meet its investment potential in years to come. From land acquisition to the environment to laws with retrospective impact, India appears to be losing out on its attraction as an investment destination. More importantly, the country’s power sector continues to be a drain on its economy, with shortage, tariffs and dependence on imported fuel hampering productivity even as investors appear to be shying away.