History shows that mere policy changes or announcement of subsidies and incentives alone doe not bring in the desired change.

It has become common for our trade pundits to often make emphatic claims that that India is set to become the next major global manufacturing hub. Indeed, an aspirational goal or maybe just some wishful thinking. Attaining this goal needs a realistic view, considering the myriads of problems the manufacturing sector is facing today, amidst growing concerns of global economic slowdown, poor infrastructure, volatile currency fluctuations and inflexible labour laws.

Uphill task

Unless a major paradigm shift takes place to create a manufacturing-friendly ecosystem through policy changes, significant improvements in power, ports and people issues coupled with a tariff structure that promotes and incentivise manufacturing, this will remain another promise or potential unrealised. For any economy whose growth is dependant on manufacturing must witness a contribution from this sector in excess of 20 per cent to make any worthwhile impact on the GDP growth. Unfortunately, given the current trends and the government policies, this will remain an uphill task for India to reach this milestone.

Every country in the world provides equal if not better opportunity for local manufacturing compared to imports. However, surprisingly, in India, the taxation is so skewed that it is often easier and cheaper to import equipment than manufacture it locally. This is the biggest impediment for the growth of our manufacturing industry.

Let us take a simple example; the import duty on medical devices is only 5 per cent and with Special Additional Duty (SAD), put together, the total duty will be 10 per centwhich is passed on to the consumers. The VAT is not applicable, as the product is imported as SICOI (sale in the course of imports). On the contrary, if one were to import the components for the equipment and manufacture the same in India , the import duty would be similar , if not more, followed by Excise duty and VAT, the sum total of which would be far higher than the 10 per cent paid on import of the finished products. This is one reason why more than 80 per cent of medical equipments are imported and not made in India resulting in higher cost to patients and providers. The total cost of taxation on the equipment can go up to two times the cost of taxation on imports!

Domestic consumption

Under these circumstances, there is only disincentive to manufacture products in India, let alone any incentive, even without taking into account the challenges of labour employment, infrastructure and procedural delays. With a large consumer base, India is a consumption-driven economy and manufacturing for domestic consumption has to be encouraged and facilitated, with the twin objective of creating large employment opportunity in the organised sector and fuelling the economic growth.

The large scale manufacturing for domestic markets would make us more competitive from both cost and quality stand point of view and provide opportunities for exports to developed countries. But before that, the government has to view the manufacturing sector from the macro as well as micro levels to understand the levers that would accelerate the growth of this sector and encourage capital investments both by domestic and foreign companies.

A thriving and competitive manufacturing industry needs an excellent infrastructure that would enable it to be competitive on cost, quality and supply chain, three important parameters that determine the success of the industry. However, most states do not provide grid power and the cost of captive power to grid is 1:3, while water is a huge challenge in almost every state. The time taken for clearances in ports is anywhere between three days to one month. These inefficiencies adds to the cost and impede the ability to supply quality products on time and form deterrents for new entrants to this sector.

Working population

India has a large working population and this can be a competitive advantage for labour intensive manufacturing and we can achieve the same success we got in IT. Negating this inherent benefit are our archaic labour laws, some of which have created problems in recent times for various companies. The ability to right-size and downsize employment, aligned to the market demands for the products manufactured in India, is imperative, if we are to grow our manufacturing operations in India. The laws in India should facilitate the same with due provisions inbuilt to protect workers interest and avoid exploitation. It will create more employment opportunity and provide a fillip to manufacturing activity in India.

In a free market world, there is no guarantee of employment to anyone and the sooner we realise this and adjust ourselves to this ground reality the better we are placed to build our manufacturing industry.

(The writer is President & Managing Director, TE Connectivity India)

(This article was published on March 14, 2013)
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