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‘It is not easy to pass on all costs in a competitive economy'

Purvita Chatterjee | Updated on March 24, 2011

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Until we have some stability in commodity prices, there will be no increase in consumer products and subsequently no increase in production. Manufacturing, in general, will be impacted. Mr Jamshyd Godrej, Chairman, CII Manufacturing Summit



Mr Jamshyd N. Godrej, Chairman, CII Manufacturing Summit, says the biggest concern for the manufacturing sector is commodity cost inflation.

Describing the state of the manufacturing industry today, he says: “The overall manufacturing growth is good. When demand is good, growth is good. This year we are getting bit of a base effect since the year-ago period was very good for the industry and since then there has been a flattening effect. Today the concerns are on cost and inflation.

“When the prices of commodities keep growing, it affects to what extent people will buy consumer and industrial goods. In fact when the demand for consumer goods rises, the demand for industrial goods rises, and vice-versa. There will continue to be concerns about costs in terms of commodity and oil prices, unrest in the Middle East, all leading to increase in costs. The ability to pass it on to consumers and industrial customers is limited as it is not easy to pass on all costs in a competitive economy.”

In fact, unless there is stability in commodity prices, it will continue to impact production and manufacturing in general. “Manufacturing is a function of a number of things which includes domestic demand and foreign demand. The latter is very depressed. Global trade is not growing the way it used to.

“China has also experienced inflation after many decades and would be moving away from exports to cater to local demand. But because of inflation domestic demand has got restricted so it is not easy to move production into domestic demand. My feeling is that until we have some stability in commodity prices there will be no increase in consumer products and subsequently no increase in production.”

Conditions

Besides, it would be unfair to compare the growth in the services industry with the growth in the manufacturing industry.

“Unlike services there are blips in the manufacturing industry and there is no reason that in the long term growth between 8-10 per cent is fine but we would like it to go up to 10-12 per cent for which we need a set of conditions.

“The first condition is that there should adequate infrastructure. Supply chain and cost efficiencies are complex in manufacturing. In fact, the supply chain in manufacturing is a long and complicated process due to its dependence on raw materials, components, imports. So get efficiency in supply chain, infrastructure is the first and foremost essential in terms of roads, ports, power etc.

“The second condition is de-regulation in terms of commerce. We still have barriers such as octroi tax. In fact for exports, we need to get a refund on octroi and there continue to be many such road blocks. GST (goods and services tax) will benefit manufacturing enormously because it will help in building an efficient supply chain and everyone in the chain will get credited and a value added stream will build in efficiencies.

“Today manufacturing bears the burden of taxes so such issues need to be addressed. Services came in much later after manufacturing and the former did not have legacy issues for taxation. We need to bring in efficiencies in the terms of trade for the manufacturing sector,” added Mr. Godrej. Comparing States such as Gujarat and Maharashtra in the western region, Mr Godrej said, “In the western region, economic activity continues to be higher in Maharashtra than in Gujarat. Gujarat, as a State, is more effective for process Industries rather than manufacturing units.

MULTIPLIER EFFECT

“A lot of MoUs have indeed been signed by the Government with various corporate bodies, but a healthy ground level implementation is yet to be seen. However, once the Mumbai–Delhi Corridor Project is complete, the State of Gujarat will benefit a lot since a vast stretch of the Corridor will pass through the State and also link it to the two cities of Mumbai and Delhi.

“The Corridor will have a huge multiplier effect on the State's economy. Maharashtra has a good share of industrial units, but the investment climate needs to be enhanced further. For manufacturing, land is crucial and all Governments would have to consider and solve the land issues. Instead of comparing India to the more advanced economies, Mr Godrej feels that it is the emerging countries whose economies should be compared with India.

“India should look into the development patterns of countries like Malaysia, Turkey, Indonesia, Thailand, Brazil, etc. which have a much greater contribution of the manufacturing sector in their economy,” he said.

Skill development

Besides, skill development remains the biggest problem for the manufacturing sector and the government is not doing enough to improve it.

“Skill development is the only way to promote entrepreneurship in the country. This will help India to train and use its vast pool of unskilled employable youth reserve.”

“We have a large population but unless it has skill sets, it is of no use. Not enough is being done for manufacturing in terms of taxation and structures and that is where we are suffering.

“There needs to be more encouragement in this industry,” Mr Godrej concluded.

Published on March 23, 2011

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