The Hindu Business Line : Building on manufacturing strengths

Raising the share of manufacturing in GDP is possible, but calls for concerted action by government and industry. Indeed, it is the inadequacies and flaws in infrastructure that have hamstrung our competitiveness in manufacturing, notably in terms of high transaction and business costs, not to speak of export inefficiencies, says C.P. RAVINDRANATHAN.

A recent book on India comments on the oddity of a country of over a billion people and seeking a rate of growth high enough to create the maximum number of jobs, employing just seven million workers in the formal manufacturing sector as against more than a hundred million in China.

It also observes that labour-intensive manufacturing, which should be India’s way to generate employment and create wealth, is far thinner on the ground than in China.

It is not so much competition with our neighbour that is at issue here. India’s inferior performance in manufacturing has historically meant under-utilisation of its one important productive asset, vast reserve of labour — rural and urban, with all its consequences, from a slow rate of economic growth to export pessimism.

Neither agriculture in the rural economy nor services in the urban economy has ever offered the possibility of substantially and productively absorbing the world’s second largest national stock of labour that we possess.

The Planning Commission recognised this stark fact even in the early 1950s, so also did the political leaders of the time. Yet labour-intensive manufacturing, except in the set of policies on protection for small industries has not received the importance it should have in the initial phase of the post-1991 economic reforms.

Thus the share of manufacturing in GDP increased from 15.6 per cent in 2000-01 to just 16 per cent in 2005-06, while its share in exports reduced by about 7 per cent during the same period.

Bias for services

In recent years, the extraordinary growth of the service industries, particularly IT and ITeS, has strengthened the view that the economy is in a fair way to following a precocious or unique model of service-led growth. There have been even assertions that India could bypass that stage in the development process where the manufacturing sector imparts the main stimulus to employment generation and structural change in the economy.

Nothing could be more erroneous. The thrust of historical evidence is that the structural shift to a truly service-dominated economy is possible only for a country that has already gone through the transformational dynamics of manufacturing, unless it is an exceptional case like the tiny Luxembourg or Singapore with its entrepot background. And even in Singapore and indeed in Hong Kong, manufacturing has had a considerable role in upgrading the level of technology and national skills, so essential to provide space and depth to the services sector.

Competitiveness

The critical importance of manufacturing is all the more obvious for India when one considers the extent of over employment in agriculture and allied activities (60 per cent of the country’s employment as against 18 per cent of its GDP) and the virtual impossibility of services, however staggering their growth, to provide remunerative and productive employment to the ten million people estimated to join the workforce annually.

Manufacturing industry offers better hope of doing so, on the strength of a vast domestic and increasingly global market for its vast variety of products. Services jobs on a significant scale could also result from growth of manufacturing, as China’s example bears witness.

But if a more hastened growth of manufacturing industry is India’s prime need at present, achieving it in an era of lowered tariffs and open economies is no easy task. It calls for national competitiveness that is a function of technology, labour productivity, managerial skills and marketing.

To foster and sustain competitiveness in manufacturing industry, we would need to measure up to the global standards in all these parameters. The large number of small industries and some big industrial units that were ground down since 1991 and the many thousands of SMEs that remain on the ‘sick list’ today testify to that fact.

Promising track record

One of the notable initiatives of the present government has been the recognition of the need to raise the competitiveness of manufacturing industry through the setting up of the National Manufacturing Competitiveness Council (NMCC).

Operating somewhat like a Planning Commission for manufacturing industry, NMCC’s vocation is to engage with various ministries so that with inputs from the Council, the former could formulate medium and long term strategies to pursue competitiveness in their particular sub-sectors. Its most promising initiative has been to attempt collaboration with the Investment Commission and through it to reach out to business and industry where the real action lies.

A strategic approach to the wide array of issues relating to FDI is a valuable outcome to be expected out of such interaction and synergy. For another, the private public partnership termed ‘Vikas’, which is focused on the clusters of textiles in Tirupur, pharmaceuticals in Ahmedabad and automotive components in Pune, is a significant step taken by the NMCC.

The Ministry of Small Scale Industries for its part is also trying to keep its end up on manufacturing industry. It enacted last year the MSMED Act to promote the development and enhance the competitiveness of medium and small industries, together accounting for as much as 40 per cent of the gross national industrial value added and 44 per cent of manufactured exports in 2005-06.

The Ministry and NMCC would need to work in much closer partnership and indeed show concrete results in enhancing the strength and capability of this vital sector and integrating it into the country’s national and global supply chains.

Indeed what is fundamental to the development of manufacturing industry is infrastructure. For it is the inadequacies and flaws in infrastructure that have hamstrung our competitiveness in manufacturing, notably in terms of high transaction and business costs, not to speak of export inefficiencies.

To mention an example, the head of a leading multinational which is Europe’s biggest consumer electronics manufacturer and the third largest manufacturer of hospital equipment has gone on record that India’s manufacturing competitiveness is negated to an extent by expensive logistics, making Indian products costlier in terms of landed price. This consideration has no doubt been an important constraint on foreign direct investment in India.

It is, however, reassuring that our infrastructure is at last receiving serious attention in terms of specific projects and size of outlays on time-bound basis (the latest projection is $470 billion in the 11th Five Year Plan).

More than any single factor, the expected improvement in infrastructure in the next few years will provide the strongest impetus to India’s manufacturing sector.

The role of SEZs

The Special Economic Zones (SEZs) that are now taking shape under the legislation enacted last year – over 320 at the time of writing – are designed to overcome the infrastructural constraint, apart from offering other incentives for exports and for foreign direct investment. But how justified are the hopes, entertained by the enthusiasts for SEZ, that Indian manufacturing industry has now reached a turning point with the setting up of these infrastructure-rich zones?

In fact, SEZs should ideally have been operationalised with the NMCC playing a nodal role in defining their features and ensuring that the whole scheme and its vast revenues foregone served the objective of placing our manufacturing industry on an efficient and competitive footing.

If that had been done, there would have been a greater clarity of purpose and vision about SEZ’s role as a prime mover in turning India into a thriving manufacturing base, drawing on world class infrastructure and factor conditions including FDI in much the same way as the Chinese SEZs.

That option not being available now, the second best course is to associate the NMCC with the monitoring, mentoring and competitiveness auditing of the working of the SEZs. These tasks would need to be part of a broad consultative process in which the Ministry of Commerce and Industry should have the overall facilitating role and business and industry their own share of pro-active participation.

Only through such synergies can the manufacturing sector hope to achieve the target of raising its share in the country’s GDP from the current 17 per cent to 30 per cent in the next five years.

(The author, a former Indian envoy to several countries is now Professor at XIME, Bangalore.)