The Hindu Business Line : Manufacturing needs a policy crank-up

India can become a global manufacturing base, notably in automobiles, components, electronic hardware and pharmaceuticals. To ensure that this sector grows, small and medium enterprises need policy support and public sector enterprises made more competitive through further reforms, says S. D. NAIK.

The continued resurgence in manufacturing activity on the back of strong domestic and export demand contributed significantly to the robust GDP growth during 2005-06. The upturn in the industrial sector, which began in 2002-03, has entered its fifth year of expansion, driven by the manufacturing segment. After growing at 8.1 per cent in 2004-05 and 9.1 per cent in 2005-06, the manufacturing sector recorded a growth of 11.2 per cent in April-June, the same rate as a year ago.

During July, the sector recorded a growth of over 13 per cent, albeit from a lower base during the previous corresponding month. Going by the available indicators, the manufacturing sector is expected to register a double-digit growth during 2006-07. The manufacturing sector appears set to move on to a higher growth path after growing at an average rate of around 7 per cent over the past two decades.

In terms of use-based classification, the capital goods sector continued to grow at a healthy rate even as there was a sharp rise in imports, reflecting high investment demand in various sectors such as automobiles, power equipment, metals, oil and gas and petrochemicals. Domestic production of capital goods recorded a growth of 15.7 per cent during 2005-06 — the highest since 1993-94.

The resurgence

The sustained pick up in the growth rate of manufacturing in recent years is due to the steady expansion of domestic as well as export demand, increased capacity utilisation, augmentation of capacities, and positive business and consumer confidence. During 2005-06 and till August 2006, a noteworthy aspect of economic activity has been the acceleration of manufacturing activity that has been led by both investment and consumption demand. The export demand has also been growing steadily.

A distinctive feature of this resurgence is the growing competitiveness especially in respect of sectors such as automobiles, auto-components, telecommunications, electronics, pharmaceuticals, cement, steel and readymade garments. Evidently, concerted efforts by Indian companies over the past few years at restructuring, cost-cutting, better capacity utilisation, quality improvement, lower interest rates and better inventory management, have started yielding dividends.

With capacity utilisation reaching optimum levels in most industries, the corporate sector has drawn up ambitious expansion plans.

The manufacturing sector is now in the midst of an investment boom, which is much more robust than the previous one in 1994-97.

The emerging favourable environment holds the potential for India to become a manufacturing base for global production in certain sectors, notably automobiles, auto-components, electronic hardware and pharmaceuticals.

Inherent strengths

Indian industries enjoy certain inherent strengths such as a relatively inexpensive highly-skilled labour force, a large manufacturing base, a vast domestic market and proximity to some of the emerging economies in Asia. This augurs well for maintaining high growth in the sector in the medium term and to increase the country's manufacturing exports significantly.

Now is the time to initiate measures to make this sector an engine of growth and raise its share in GDP.

It is a matter of genuine concern that the share of manufacturing in India has remained almost stagnant for over a decade at around 17 per cent of GDP, even as the share of services has surged.

Unlike in most developed and developing economies, including China, the decline in the share of agriculture in GDP in India, from 41 per cent in 1970-71 to 20 per cent in 2005-06, has been more than absorbed by the services sector with its share rising from 36 per cent to 61 per cent over the same period.

However, the share of manufacturing has only inched up from 13 per cent in 1970-71 to 17 per cent in 2005-06.

Atypical transition

Indeed, the Indian experience is somewhat atypical. Historically, most economies have passed through a phase of rapid industrialisation leading to a rise in the share of manufacturing in GDP before maturing into largely service economies. India, however, seems to have skipped the phase of manufacturing boom, while undergoing a structural transformation from a predominantly agrarian economy to move directly to a mainly service economy. This is unnatural.

According to most economists and experts, the reason for the explosive growth of the services sector is the sub-optimal growth rates in both agriculture and industrial sectors and their failure to absorb the fast growing labour force.Those without work are forced to take up some sort of service activity even if that provides only a sustenance income. Only the knowledge-based services, such as compute software and information technology, are exceptions to this.

The widespread unemployment and poverty and a large labour force engaged in agriculture underscores the importance of raising the share of manufacturing in the GDP to create more job opportunities. Given the business environment and the opportunities to make the country a manufacturing base for a number of multinational companies, it should not be a difficult task, provided the sector is given the required policy support.

The National Strategy for Manufacturing released by the National Manufacturing Competitiveness Council (NMCC), set up by the Ministry of Commerce and Industry, has suggested that the rate of manufacturing growth has to reach 12-14 per cent per annum in order to raise its contribution to GDP to 23 per cent by 2015. Even this target presupposes that the other sectors will grow only at their trend rates.

Enabling growth

If the manufacturing sector is to grow at around 14 per cent, the GDP will have to grow at about 10.5 per cent in the coming years. In such a scenario, the prevailing infrastructure facilities, which are already stretched, will come under tremendous pressure. Hence, the NMCC has pointed out the need to improve the power situation, apart from expanding and modernising roads, railways, ports and airports. High-speed road and rail corridor projects would have to be taken up on a priority basis.

To ensure that the manufacturing sector grows at the recommended rate, the NMCC has emphasised the need tfor policy support to small and medium enterprises (SMEs) to enable them realise their full potential, and more reforms to enable public sector enterprises (PSEs) meet competitive conditions in a globalising economy. Some of the important areas in which PSE reforms are needed include autonomy, review mechanism, delegation of powers, and sourcing decisions.

The NMCC has also rightly highlighted the need to strengthen education and skill-building in order to check the growing mismatch between the needs of the industry and the availability of skilled manpower.