The Hindu Business Line : `Domestic manufacturing potential yet to be fully tapped'

THE Indian manufacturing sector has to grow much more before its full potential is realised, particularly when the share of manufacturing in gross domestic product (GDP) has remained between 16 and 17 per cent during the last two decades, according to Mr Anwarul Hoda, member of the Planning Commission.

Mr Hoda, who is looking after industry and trade issues in the Plan panel besides heading a high-powered committee on mineral policy issues, told Business Line here in an interview that the share of manufacturing in GDP rose from 15.8 to 25 per cent in Indonesia, from 19.3 to 31 per cent in Malaysia and 21.9 to 35 per cent in Thailand during the same period. He said India's share of value-added in world manufacturing rose from 1.06 per cent in 1990 to 1.24 per cent in 2001, while China "powered ahead from a share of 2.52 per cent to 7.54 per cent during the same period".

Stating that the East Asian experience has been that economic growth is based on substantially increasing the industrial base, Mr Hoda said the Indian industrial sector has shown signs of strengths in recent years, with the growth rate rising from 4.5 per cent in the Ninth Plan to 6.6 per cent in the first two years of the Tenth Plan and further to 7.8 per cent in 2004-05 and 9.9 per cent during the first six months of the current fiscal.

He said, traditionally the country has been strong in labour-intensive industries such as apparel, footwear, jewellery, leather and textiles. But of late, it has emerged as a key player in skill-intensive industries such as auto components, generic drugs and speciality chemicals. Mr Hoda said that still the manufacturing sector suffers considerably from "rigidity in labour laws as well as from the infrastructural deficit". He said, "political consensus has proved elusive in introducing some flexibility in the labour laws."

On infrastructure, he said the Government is engaged in a massive effort to bring about improvement but this would need to be sustained for many years before "we achieve world-class infrastructure". He deplored the fact that efforts to improve the quality and quantity of power have been foiled by large-scale transmission and distribution losses.

Pointing out that the Indian manufacturing sector has by and large withstood the "competitive pressures" from imports, even as tariffs on industrial goods have been cut from the levels of more than 100 per cent to a peak of 15 per cent. But he conceded that some small-scale industries have been adversely affected mainly due to lack of economies of scale. In some cases, this has been exacerbated by imports on which duties have been evaded and in others by instances of inverted duty structure. The Government, he said, is "striving to check informal trade and to eliminate inverted duty structure".

Mr Hoda said that the domestic manufacturers have demonstrated their global competitiveness by notching up export growth by 20 per cent or more during the last three years. It has become apparent that global trade merchandise and services would play a bigger role in stimulating India's economic growth in the future. He, however, hastened to add that it does not mean that the country needs an export-led growth strategy.

"With a growing middle class and their increasing purchasing power, domestic demand is likely to be a more powerful engine of growth than external demand," he said, adding that domestic-demand growth strategy is likely to be more successful in India's case than the export-driven strategy that was practised by the East Asian economies.

Asked about whether the exporters hold themselves against competition competently or seek sops to survive in the post-liberalisation phase, Mr Honda admitted that exporters today are not seeking sops to the same extent as in the pre-liberalisation era. They had taken in their stride the elimination of concessions for exports that was available until a few years ago under Sec 80 HHC of the Income-Tax Act. He said the main bid now is to secure full tax neutrality of exports as far as customs duty and indirect taxes on input are concerned through schemes such as Duty Drawback and Duty Entitlement Pass Book (DEPB). This is justified on economic considerations and is also consistent with WTO obligations, he said.

As a former Deputy Director-General of the WTO, Mr Hoda points out that in rebating indirect taxes, it has to be ensured that systems are in place to check any over-rebate. "Exporters have to be mindful of this requirement as no useful purpose can be served by incentives that are countervailed against in importing countries," Mr Hoda said.