The Hindu Business Line : Strategy for manufacturing

A recent report by the Prime Minister’s Group on the manufacturing sector has called for a review of the country’s FDI (foreign direct investment) policy as part of a package of measures to lift the trend rate of industrial growth from the post-reforms level of 7 per cent per annum to about 12 per cent. Comparing India’s liberalisation experience with that of China and the East Asian ‘Tiger’ economies, it says that the lifting of barriers to FDI flows has not led to technology transfers because policy was not focused to this end. Technical collaborations have lost out, thanks to the entry of wholly owned subsidiaries of foreign firms. Besides, the cost of acquiring new technologies has gone beyond the reach of small and medium enterprises (SMEs) in particular. Citing the East Asian focus on SMEs as drivers of innovation, the report suggests the creation of a technology acquisition fund for them.

While the lifting of investment and trade barriers after 1991 spurred competition and capacity creation, the absence of an industrial policy might have cost India dear. India’s trend rate of economic growth of about 6 per cent after 1980 has been achieved merely on the basis of higher factor productivity in the services sector. According to studies, total factor productivity in industry rose by 1 per cent per annum between 1980 and 2004, against an annual rate of 2.9 per cent and 1.1 per cent in the case of services and agriculture, respectively. The time has come to identify sectors in industry where new technologies are necessary.

Energy is a critical area. At a time of rising fossil fuel prices, Indian manufacturing has no choice than to raise its energy efficiency. The cost of gas-fired and renewable energy technologies is rapidly falling, thanks to R&D efforts in the industrialised countries. The unit capital cost of large combined cycle gas turbines has dropped by an estimated 35 per cent since the beginning of the 1990s. Similar cost reductions have been reported in the case of wind and solar power. India should acquire the latest green technologies and beef up R&D in these areas, improving the productivity of capital while also keeping carbon emissions under control. To improve labour productivity, the current shortage of skills should be addressed by raising both the quality and quantity of scientific and technical personnel. While the report rightly calls for a further reduction of indirect tax rates to reduce the gap between the prices of Indian and Chinese goods, what Indian industry really needs is a long-term policy to raise productivity.

Related Stories:
Group on Manufacturing moots linking of FDI approvals to tech transfer
FDI set to touch $40 billion this year
Industrial growth touches 5-month high of 7.1% in July

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