The Hindu Business Line : Industry in 2004: Manufacturing momentum quickens

THE Indian manufacturing story, which began gradually unfolding since 2002, had witnessed a substantial improvement in efficiency but a hesitant recovery in 2003. However, 2004 witnessed the building up of industrial resurgence of sorts in the true sense of the term with a substantial pick up in manufacturing exports, outsourcing contracts and new investments.

For the April-October 2004 period, the index of industrial production (IIP) grew 8.4 per cent as against 6.2 per cent over the previous corresponding period, thus making the current fiscal, the best since 1995-96, when the industrial sector had grown by a heady 13 per cent. The manufacturing growth during the first seven months of 2004-05 stood at 8.8 per cent (6.8 per cent).

The manufacturing index has witnessed a steady rise since May this year with big jumps occurring in September and October. The IIP registered a year-on-year growth of 10.1 per cent in October, compared with 6.2 per cent in the same month last year. Most experts believe that the manufacturing growth will pick up further momentum in the coming months leading to sustained double-digit growth as had happened in the mid-nineties.

As per the use-based classification of IIP, the bulk of the growth is being driven by capital goods, intermediates and consumer goods. The index for capital goods registered an impressive growth of 19.2 per cent during October and 15.1 per cent in April-October 2004 against the corresponding year-on-year growth rates of 4.9 per cent and 9.2 per cent during October 2003 and April-October 2003 respectively.

Moreover, sustained growth in the domestic production of capital goods has been accompanied by large-scale imports of such goods, signalling increased investment activity. The total merchandise imports have also continued to record strong growth during the current fiscal so far. While oil imports during April-November 2004 swelled by a hefty 56 per cent because of the surge in international crude prices, non-oil imports posted a strong growth of 26.8 per cent with the firming up of industrial recovery.

Significantly, the pick up in manufacturing growth in 2004 was not only because of higher domestic demand but was also backed by the strong export push. Export earnings during April-November 2004 crossed $48 billion, registering a growth of 24 per cent for the eight-month period. In November 2004, the country exported goods worth $6 billion and the total export earnings in 2004-05 are all set to reach $75 billion.

However, one segment where the growth performance is still unsatisfactory is the infrastructure industries. While the subdued performance of this segment in 2003-04 has been reversed during the current fiscal, the overall growth in infrastructure industries in April-October 2004 accelerated only marginally to 5.9 per cent from 5.4 per cent in the previous period. The core sector needs to grow at a much higher rate to sustain the growth momentum of the industrial sector.

While 2003 had seen a spate of mergers and acquisitions, 2004 was a year when organic growth through both greenfield and brownfield projects gained momentum. Across sectors such as steel, automobiles, auto components, consumer electronics, pharmaceuticals, and textiles, companies are investing big money in expanding existing capacity and setting up new capacity. While the steel industry has drawn up massive investment plans to invest over Rs 75,000 crore over the next seven-eight years, investments worth Rs 25,000 crore are expected to materialise over the next two years.

Automobile majors — Suzuki Motor Corporation, Maruti Udyog Ltd and Tata Motors — are expected to invest nearly Rs 12,000 crore over the next three-four years. Several thousand crore worth of investments are also under implementation in the auto component sector. In the textile industry, new investments to the tune of Rs 30,000 crore are under implementation and more investments are expected over the next four-five years.

According to the data collated by the Centre for Monitoring Indian Economy (CMIE), the total planned investment by private and public sector companies over the next four years will be in excess of Rs 7 lakh crore. This includes investments under implementation of Rs 2 lakh crore. After 1994-96, this is the first major wave of investments being made by all sectors with bulk of the investment coming from public sector companies.

Further evidence of increased investment activity is provided by the off-take of bank credit, which witnessed a sustained increase during the year. On a year-on-year basis, growth in non-food credit was 27 per cent, the highest since 1997. According to the Reserve Bank of India's Report on Currency and Finance, the growth in industrial credit this year is dominated by two sectors — infrastructure and petroleum — which accounted for as much as 86 per cent of the incremental off-take during April-September 2004.

The pick up in industrial credit has further been supplemented by an increased recourse to external commercial borrowings during the year. In addition, improved corporate profitability and internal generation of resources remained an important source of funds for the industrial sector. Of the Rs 200,000 crore investments lined up by manufacturing companies over the next two years, Rs 100,000 crore will come from internal generation.

The ongoing phase of industrial rebound could be attributed to improved investment climate, increased domestic demand and expanding external demand, ease in availability of finance at lower cost and increasing capacity additions.

The industrial sector has received a further boost because of the increased momentum of manufacturing outsourcing. India is fast developing into a manufacturing hub for multinational corporations (MNCs) with growing recognition of the sector's skills in production design, reconfiguration and customisation with assured quality and value-addition.

While some MNCs have entered into deals with Indian companies to source components, others have set up Indian arms to supply to global markets. For instance:

General Electric Corporation has entered into an OEM deal with Thermax India to supply chillers for the latter's power systems;

South Korean two-wheeler major, Hyosung is making India the manufacturing hub for its 250 cc cruiser bike, Aquila through a technical tie-up with Pune-based Kinetic Engineering;

Ford Motor Company intends to source $120-160 million worth of components from the Indian manufacturers over the next two years;

Global consumer electronic giant, Matsushita of Japan has decided to source Panasonic television sets from India for its international markets;

Korea's LG is investing $150 million in a new factory in Hyderabad to manufacture and export television sets and refrigerators;

Finland's Elcoteq, which makes cell phones for companies such as Nokia, will begin assembling handsets in Bangalore, while Ericsson will manufacture radio transmitters and receivers for cell phones in Jaipur;

Colgate is setting up a brand new toothpaste facility in western India, which will be one of 15 such facilities across the world;

Hyundai Motor Corporation has announced its intention to make India an export hub for auto components;

Toyota-Kirloskar has drawn up big plans to introduce more models in India, including a passenger vehicle combining elements of a hatchback, SUV and mini-van. This list is by no means exhaustive and provides only an idea of the unfolding story in manufacturing outsourcing.

A heartening feature of the manufacturing story in 2004 was the further pickup in India Inc's investments abroad. What had started as a trickle two year ago, gathered considerable momentum in 2004. For instance, Tata Steel acquired National Steel of Singapore for about $468.4 million. Again, Tata-owned Videsh Sanchar Nigam Ltd bought Tyco Global Network for $130 million. Indian public sector companies such as ONGC have also become more aggressive in the overseas space. Recently, ONGC Videsh Ltd has gained foothold in a number of countries, including Ivory Coast and Australia. Many other Indian companies such as Tata Motors, Bharat Forge, Sundram Fasteners, Sona group, to name just a few, have made an aggressive push abroad over the past year. Many more acquisitions and overseas tie-up are in the offing.

The country's annual FDI outflows have crossed $1 billion and they are expected to record significant increase next year. As for the FDI inflows, while they have recorded a significant increase in 2004-05, they are still inadequate to maintain a sustained growth in export-led growth of the manufacturing sector. The Centre has recently announced measures to attract higher FDI in critical areas such as infrastructure.

Against this backdrop, it is not surprising that recent business confidence surveys indicate a much higher degree of optimism in regard to future growth prospects of the industrial sector. They also expect the growth to be broad-based and encompass the small and medium enterprises (SMEs).

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