If India boards the goods train, it’s bye-bye China

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The cloud over the Indian manufacturing sector has a silver lining now as it showed the fastest growth in past 13 months ending August. With this, Indian manufacturers have a golden chance to emerge from the shadow of the country’s sunrise sector: services.

Leading consultancy McKinsey’s analysis finds that rising demand in India has been matched by many multinational companies’ willingness to move to low-cost plants in countries other than China. These two factors could trigger growth and help our manufacturing sector to grow six-fold by 2025 to $1 trillion. They find that this would create up to 90 million domestic jobs in the Indian market, that gave a further push to the Purchasing Managers’ Index (PMI) in August.

Consumer goods producers led the increase in the manufacturing sector. Experts point out that “Manufacturing PMI data shows that the positive momentum seen at the beginning of the second semester has been carried over into August, with expansion rates for new works, buying levels and production accelerating further.” There is a forecast of a “robust 7.5 percent increase in Gross Domestic Product during 2016-17” — and a broad indication in this regard has come from none other than Finance Minister Arun Jaitley.

Last month, the Reserve Bank of India left key rates unchanged, citing upside risks to its inflation target for March 2017, but under new RBI Governor Urjit Patel, one can hope for major decisions by the Monetary Policy Committee (MPC). Soon, India’s product makers would have a golden opportunity to join the global Big League.

What needs to be done?

The central and state governments must eliminate the barriers that slow down the efforts of the manufacturing sector to improve productivity and profitability. More than half of India’s employees in the organised sector still work in government-owned institutions where there are stringent laws relating to hiring and firing. However, declining government ownership has improved the productivity of labour and capital in other parts of the economy. India’s automotive sector, for example, was among the first to be liberalised, in the early 1990s, and the entry of multinational and domestic players sparked a competitive transformation. Today, India produces nearly 3 million small cars a year, of which about one-quarter are exported. For a majority of sectors, India can help raise productivity even further.

Then the distortions in the land market, like high stamp duties and corruption, are a huge barrier to productivity improvements. In the steel industry alone, we estimate that more than $60 billion of committed capital currently awaits environmental or land clearances. Also, stringent labour laws make it difficult for companies to restructure and thus to increase their productivity and expand output. Firing underperforming workers is difficult in India, and this ongoing problem translates into high levels of unproductive workforce in many companies. There is an urgent need to liberalise labour laws by encouraging re-skilling programmes that could help workers become more productive and prepare them for new jobs. The newly launched National Skill Development Corporation is experimenting with ways to use public–private partnerships (PPP) to strengthen vocational training.

Then there is a need to create industry-oriented infrastructure like roads, ports, and power-surplus states’ generating capacity across India.

Recently, India’s Ministry of Commerce & Industries called for the development of National Investment and Manufacturing Zones. The encouragement of such industrial clusters is a positive development, since they are a proven way of catalysing the efforts of the public and private sectors to address infrastructure challenges. The country’s central and state governments can help by dismantling barriers in markets for land, labour, infrastructure, and some products.

Made in India?

Till recently, our manufacturers were performing below their potential. Although the country’s manufacturing exports are growing, our manufacturing sector generates a meagre 16 percent of India’s GDP but is still much less compared to the 55 percent from services.

Also, China generates 47 percent of GDP from the manufacturing sector. There is little doubt that the manufacturing sector has been less attractive than its counterparts in parallel economies, particularly China.

Significantly, China’s manufacturing sector captured nearly 47 percent of the global growth in exports from low-cost countries between 2001 and 2010, whereas India accounted for a paltry 5 percent.

Target 30 percent GDP by 2025

The country could become a viable and profitable manufacturing alternative to China in industries in manufacturing sector. If India’s manufacturing sector reaches optimum levels, it could generate 30 percent of GDP by 2025. This would be a win-win situation for industry and the government as it would place India in the manufacturing Big League with China, Germany, Japan and the United States, alongside creating as a consequence about 90 million new jobs to become a preferred attractive investment destination for its own entrepreneurs and multinational companies.

If India’s manufacturing sector reaches optimum levels, it would be a win-win situation for both the industry and the government

The McKinsey benchmarking study of 75 Indian manufacturers has found that for an average company, the potential productivity improvements represented about 7 percent in additional returns on sales. Some companies are already taking great strides. Tata Steel, for instance, improved its output per worker and reduced the number of managerial layers to 5 from a double-digit figure. Today, the company trains more than 2,000 employees a year in both “hard” skills as well as “soft” ones — such as conflict resolution — which have helped it become one of the world’s lowest-cost steel producers.

Follow IT mantra

The manufacturing sector could take a cue from the Information Technology (IT) sector’s experience in promoting skills that have led to the hiring of over a million new recruits every year. Infosys, Wipro, and other companies began hiring graduates from all engineering disciplines and using their own curriculum and expertise to build skills among new recruits. Why can’t our manufacturing sector follow a similar ingenious method by establishing plant grooming centres to nurture customised manufacturing skills as required by their units?

Already, the largest automobile major, Maruti Suzuki, has adopted six technical institutes across the country. By using the company’s own staffers and guest faculty for classes, Maruti Suzuki has been able to imbibe interns with strong skills and a certain work culture. Buoyed by the response, the auto major is now experimenting to include employees of its key suppliers to include the entire chain in its skill upgradation programmes.

The consistency in growth, which is pegged at above 7 percent currently, gives the country’s manufacturing sector a huge opportunity to reverse the tide which was triggered because of inflation and slowdown witnessed in many economies of the world. History bears testimony to the fact as income levels rise, it automatically leads to more demand for consumer goods because the principle of demand and supply applies here. It is a proven fact that the domestic market grows whenever there is increase in consumption, which naturally propels demand. Another plus point for the Indian economy is that we have a big workforce which can consume most of what is generated in the country. In addition, we have an emerging supply base and access to natural resources needed for production, including iron ore and aluminum for engineered goods, cotton for textiles and coal for power generation.

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