Manufacturing Revolution

The manufacturing sector is crucial for employment generation and development of an economy. Historically, the development processes have witnessed a trend of people shifting from agriculture to non-farm activities such as manufacturing and services. This renders manufacturing crucial for India’s development and employment objectives. However, the current share of manufacturing in GDP has halted at 15%, much below its potential, thwarting India from fully leveraging the opportunities of globalisation. Recognising this, Government of India (GoI) has announced the National Manufacturing Policy, 2011 which inter alia envisages the rise of manufacturing’s share in India’s GDP to 25% by 2022 and creation of an additional 100 million jobs in this sector by the same time.
Need to Boost Manufacturing
Known economist A.G.B. Fisher has remarked, “In every progressive economy, there has been a steady shift of employment and investment from the essential primary activities……… to secondary activities of all kinds and to a still greater extent into tertiary production.”


Let us juxtapose the following two aspects:








* Figures as per Economic Survey 2012-13
The above imbalance resulting into diminishing returns can only be cured by diverging the extra workforce to remaining sectors i.e. secondary and tertiary. Since the service sector requires more educated and skilled manpower as compared to other sectors, therefore, manufacturing sector  can only play vitalrole in seizing our demographic dividend. And above all, service sector in India has already played its partby giving a handsome  sectoral contribution of 64.8% of GDP (including construction activities).
Moreover, every job created in manufacturing has a multiplier or ripple effect through indirect creation of two to three jobs in the industries/ sectors that supply(primary sector)and service(tertiary sector) the manufacturing activity. For China, South Korea, Taiwan and for most of our more successful Asian neighbours, it was the manufacturing expansion that ameliorated the lives of millions of workers    and delivered growth dividends, lifting entire economies into a new hemisphere.
The Current Signs of Distress
A. Burgeoning Current Account Deficit (CAD): India’s CAD widened to a record 5% of GDP in 2012-13 fiscal, mainly due to sluggish exports. In the quarter ending December 2012, it reached an all time high level of $33bn i.e. 6.7% of GDP.
B. Abysmal Performance: India’s GDP growth has hit a decade low of 5% with HSBC manufacturing Purchase Mangers’ Index (PMI) at a 50- month low in May 2013, indicating that India’s industrial recovery is moving sharply into reverse.
C. Mediocre Rankings:World Bank in its ‘Doing Business 2013’ Report has ranked India on 173rd position out of 185countries in starting a business and 132nd in case of doing a business. On Goldman Sachs’ Growth Environment Score (GES) 2012, India with a meager score of 3.92/10 is ranked 151 out of 183 countries.
D. Inordinate Delays in Land Acquisition: Following long delay in land acquisition, two steel majors- POSCO and ArcelorMittal have scrapped their 6 million and 12 million tonnes steel plant respectively, leaving behind the impression of unconducive economic climate in the country.
E. Depressing Index of Industrial Production (IIP):IIP contains 682 items clubbed in 399 groups: 1 in mining sector, 1 in electricity sector and 397 in manufacturing sector  and their respective sectoral weightage stand at 14%, 11% and 75% approximately.
On account of flop show by manufacturing sector, IIP contracted by 1.6% in May 2013, lowest in the past 11 months, indicating the urgency of manufacturing reforms.
It’s the time to address the issues
India seriously needs to look on the following aspects to uplift overall business sentiments and togive fillip to investment in manufacturing sector:
1. World Class Physical Infrastructure
In World Competitiveness Report 2013, Indiafinds a dismal40thrank out of 60 nations, mainly due to red-tapism involved in getting environmental and forest clearances, land acquisition and other hurdles faced by India Inc and foreign entrepreneurs.Recently constituted Cabinet Committee on Investment (CCI) for speedy clearances of big ticket projects involving investments of `1000 crores or more in sectors such as infrastructure, manufacturing, etc. and the success stories of Public Private Partnership (PPP) projects in various backward states are a step forward in this direction.
2. Flexibility in Labour Laws
India’s archaic and rigid labour laws are a big hurdle, with 45 laws and 16 associated rules at the national level and close to its four times at the state level to monitor the functioning of the labour market. The possible solution lies in harmonizing these various rules so as to make them flexible and create greater private sector demand for labour.
3. Attracting Foreign Direct Investments
In 2012-13, FDI inflows in India amounted to $22.4bn, almost 5 times less than China.Aren’t we suffering from‘Policy Paralysis’? Because even after lot of hullabaloo, cap on FDI in multi brand retail sector was raised to 51% in Sept. 2012, but any encouraging responseis yet to be seen. Japanese companies which invested heavily in China during last 3 decades are now feeling overexposed. India needs to ensure that it emerges as an alternative destination for such companies.
4. Development of Micro, Small and Medium Enterprises (MSMEs)
MSMEs have been defined in MSMEs Development Act, 2006 based on the investment limit in plant and machineryor equipmentas under:
Category Manufacturing Sector Service Sector
Micro Up to 25 lacs Up to 10 lacs
Small Up to 5 crores Up to 2 crores
Medium Up to 10 crores Up to 5 crores
(Amount showing investmentin`)
MSMEs account for 8% of GDP, 45% of manufacturing output and 40% of exports. Albeit MSME sector falls in the category of Priority Sector Lending, only 8% of total bank credit, find its way into this sector. Thus, there is a dire need of ‘financial inclusion’in form of microfinance, venture capital funding, etc. Being labour intensive, MSMEs have the potential to absorb the growing surplus of unskilled labour, particularly in BIMARU states.
5. Diversification of Export Markets
If the manufacturing sector has to grow in the range of 12-14% over the medium term, exports have to register a growth rate of 20-25% in real terms. Our main export destinations are Western Europe and the US. However, growth centers in the coming decades are expected to be economies of Africa and Latin America. It is pertinent for Indian manufacturing companies to grab the first mover’s advantage and look at tapping these markets.
6. Development of Business Clusters
India needs to really focus on development of business clusters to create an eco-system of supply-chain responsivenessand lower logistics cost. These clusters will converge the advantages of higher innovation and employment generation for smaller firms with scale and cost advantage of larger organisations and can potentially help in eliminating the Bullwhip effect to some extent.  Their advantages are clearly visible in pharma clusters in Andhra Pradesh and knitwear clusters in Ludhiana.
7. Harnessing the power of Information and Communication Technology (ICT)
Productivity is a function of innovation and technology. But due to India’s minisculespending in R&D i.e. 0.9% of our trillion dollar GDP, we have failed in culminating the global best business practices. To add fuel to the fire, researches reveal that our thinking power has been hijacked. India is on 66th position in Global Innovation Index, 2013. The best fit solution is to make hi-tech applications affordable. Learning from the example of Malaysian Industrial Development Finance which offers 75% financing at 3% interest over 5 years for SMEs to buy ICT applications, we have to incentivize any action in this direction.
8. Stay Hungry, Stay Foolish
We need to explore all the plausible ways to ensure that our unexplored core strengths won’t turn out to be the Achilles’ Heel. Hand-in-hand, unorganised manufacturing sector should also be given priority with regard to its development and recognition. Appropriate tax holidays, more SEZs,  enhancing single window clearance facility, etc. can also attract mega investments.
Highlights of some recent Government Initiatives
Since the crisis is systemic and, therefore, it needs a systemic response. Following is the gist of some recent responses from GoI:
i)National Manufacturing Policy (NMP), 2011: As mentioned earlier, its prime objective is to enhance the share of manufacturing in GDP to 25% and to create additional 100 million jobs over a decade or so. It also lays emphasis on promotion of clusters and aggregation, especially through the creation of 12 National Investment and Manufacturing Zones (NIMZs).
ii)FDI Policy Initiatives:On recommendation of Mayaram Panel, FDI norms in 13 sectors have been liberalised, indicating that reforms are underway. 100% FDI is allowed in single brand retail trading, 49% of it can come through automatic routeand the balance through approval of Foreign Investment Promotion Board (FIPB). Currently, 51% FDI is allowed in multi brand retail trading subject to certain restrictions.
iii). E- Biz Project: It is a mission mode project under the National e-Governance Plan (NeGP) for promoting an online single window for business users.
iv)Invest India:It is a joint venture company between the DIPP and FICCI. It will act as a structured mechanism to attract investment by providing inputs on all aspects of doing business in India to prospective overseas investors.
The Way Ahead….
As wages rise and China evolves into a high-cost economy, India need to fill the vacuum to become the global centre of manufacturing. A Boston Consultancy Group (BCG) report reveals that India may become 5th largest manufacturing nation if it can accomplish the targets set out by NMP, 2011. We are still the beacons of light and not the temples of doom since our demographic dividend is our biggest asset.  Showing concerns over the economic growth of the nation, Hon’ble President Shri Pranab Mukherjeehas recently said “....Indian economy has resilience to overcome the problems.” We arose, we arise and we will arise, provided we must-“Think Global, Act Local”.
References
1. Article on ‘For a manufacturing Revolution’ by Amitabh Kant in Times of India dated July 11, 2013
2. Economic Survey 2012-13
3.  Indian Economy 67th Revised Edition by Gaurav Datt and Ashwani Mahajan
4.Book entitled ‘Chanakya’s New Manifesto: To Resolve the Crisis within India’, authored by Pavan K. Verma
5. Mrunal’s Analysis of Chapter- 9 of Economic Survey 2012-13:
http://mrunal.org/2013/05/economic-survey-ch9-industrial-performance-e-biz-invest-india-manufacturing-policy-obicus-asi.html
My Details:
Name: Prateek Loonkar



















           -The Arthashastra