Manufacturing Sector: Hurdles and Responses

The importance

The manufacturing sector is crucial for employment generation and development of an economy. Historically, the development processes have witnessed a trend of people shifting from agriculture to non-farm activities such as manufacturing and services. This renders manufacturing crucial for India’s development and employment objectives.

Since the service sector requires more educated and skilled manpower as compared to other sectors, therefore, manufacturing sector can only play vital role in seizing our demographic dividend. And above all, service sector in India has already played its part by giving a handsome sectoral contribution of 64.8% of GDP (including construction activities). Moreover, every job created in manufacturing has a multiplier or ripple effect through indirect creation of two to three jobs in the industries/ sectors that supply (primary sector) and service (tertiary sector) the manufacturing activity. For China, South Korea, Taiwan and for most of our more successful Asian neighbours, it was the manufacturing expansion that ameliorated the lives of millions of workers    and delivered growth dividends, lifting entire economies into a new hemisphere.

The Problem

The current share of manufacturing in GDP has halted at 15%, much below its potential, thwarting India from fully leveraging the opportunities of globalisation. Recognising this, Government of India (GoI) has announced the National Manufacturing Policy, 2011 which inter alia envisages the rise of manufacturing’s share in India’s GDP to 25% by 2022 and creation of an additional 100 million jobs in this sector by the same time. In World Competitiveness Report 2013, India finds a dismal 40^th rank out of 60 nations

In 2012-13, FDI inflows in India amounted to $22.4bn, almost 5 times less than China.  Aren’t we suffering from ‘Policy Paralysis’? Because even after lot of hullabaloo, cap on FDI in multi brand retail sector was raised to 51% in Sept. 2012, but any encouraging response is yet to be seen. Japanese companies which invested heavily in China during last 3 decades are now feeling overexposed. India needs to ensure that it emerges as an alternative destination for such companies.

MSMEs have been defined in MSMEs Development Act, 2006 based on the investment limit in plant and machinery or equipment. MSMEs account for 8% of GDP, 45% of manufacturing output and 40% of exports. Albeit MSME sector falls in the category of Priority Sector Lending, only 8% of total bank credit, find its way into this sector.

The Hurdles and Responses

India seriously needs to look on the following aspects to uplift overall business sentiments and to give fillip to investment in manufacturing sector:

Firstly, due to red-tapism involved in getting environmental and forest clearances, land acquisition and others, hurdles are faced by India Inc and foreign entrepreneurs. Recently constituted Cabinet Committee on Investment (CCI) for speedy clearances of big ticket projects involving investments of `1000 crores or more in sectors such as infrastructure, manufacturing, etc. and the success stories of Public Private Partnership (PPP) projects in various backward states are a step forward in this direction. There is a dire need of micro structural reforms which will facilitate private investment in this sector.

Secondly, India’s archaic and rigid labour laws are a big hurdle, with 45 laws and 16 associated rules at the national level and close to its four times at the state level to monitor the functioning of the labour market. The possible solution lies in harmonizing these various rules so as to make them flexible and create greater private sector demand for labour.

Thirdly, there is a dire need of ‘financial inclusion’ in form of microfinance, venture capital funding, etc to MSMEs. Being labour intensive, MSMEs have the potential to absorb the growing surplus of unskilled labour.

Fourthly, If the manufacturing sector has to grow in the range of 12-14% over the medium term, exports have to register a growth rate of 20-25% in real terms. Our main export destinations are Western Europe and the US. However, growth centers in the coming decades are expected to be economies of Africa and Latin America. It is pertinent for Indian manufacturing companies to diversify the Export Markets in order to grab the first mover’s advantage and look at tapping these markets.

Fiftly, India needs to really focus on development of business clusters to create an eco-system of supply-chain responsiveness and lower logistics cost. These clusters will converge the advantages of higher innovation and employment generation for smaller firms with scale and cost advantage of larger organisations and can potentially help in eliminating the Bullwhip effect to some extent.  Their advantages are clearly visible in pharma clusters in Andhra Pradesh and knitwear clusters in Ludhiana.

Sixtly, Productivity is a function of innovation and technology. But due to India’s miniscule spending in R&D i.e. 0.9% of our trillion dollar GDP, we have failed in culminating the global best business practices. India is on 66^th position in Global Innovation Index, 2013. The best fit solution is to make hi-tech applications affordable. Learning from the example of Malaysian Industrial Development Finance which offers 75% financing at 3% interest over 5 years for SMEs to buy ICT applications, we have to incentivize any action in this direction.

We need to explore all the plausible ways to ensure that our unexplored core strengths won’t turn out to be the Achilles ’ heel.   Hand-in-hand, unorganized manufacturing sector should also be given priority with regard to its development and recognition. Appropriate tax holidays, more SEZs, enhancing single window clearance facility, etc. can also attract mega investments.

By: Deepak Garg