India’s manufacturing sector has stagnated at around 16 per cent of GDP for several years. As the case shows, GDP contribution from manufacturing in such countries as China and Thailand is almost double that of f India’s.
Policy paralysis, prolonged delays in implementation of key reforms (such as land, labour and tax administration), bureaucratic hurdles, corruption and lack of transparency, apart form poor infrastructure and high input costs, have been affecting the manufacturing sector for decades. Inadequate skilled labour and the lack of an innovation and risk-taking culture are other key challenges that have led to the poor performance of this sector. It requires a big push to reach 25 per cent of GDP by 2025, as envisioned by the Prime Minister.
The Make in India initiative aims to transform India into a global manufacturing hub, and stresses the need for production in India, either by Indian or multinational companies. Though the government has put in place major policies and schemes (Start-up India, Digital India and Skill Development, for instance) to improve the ease of doing business, several weak areas are still to be addressed.
Small is not always beautiful
The most prominent feature of India’s manufacturing sector is the dominance of small-scale establishments (SMEs) relative to developed countries when measured in terms of employment and output. The SME sector is responsible for 45 per cent of total manufacturing output and employs around 70 million people. However, SMEs in India have a large number of unorganised units.
Hence, the availability of capital in the form of equity and debt has been a roadblock to the development of this sector. Further, due to the relatively smaller size of many manufacturing firms, they are handicapped to reap the benefits of economies of scale.
Larger firms often use newer technologies and they achieve higher productivity through innovation, while smaller firms are much less productive. Unless Make in India initiatives attract large scale manufacturing firms to India — not only to make here but to design, transfer technology, and help develop skills — manufacturing output and productivity will improve. As discussed in the case, rising labour costs in China may open up opportunities for India to attract foreign direct investment. To attract more MNCs, the following challenges need to be addressed:
Cost of acquiring land
Cost of capital
Tax administration system
Implementation of GST and
Labour reforms
Not by Make in India alone
For India to become more competitive and a global leader in manufacturing, continuous innovation is required. Due to fiscal consolidation initiatives, the government alone cannot spend huge amounts on research and development activities, which promote technological development and innovation. R&D spend in India is around 0.8 per cent of GDP, while global leaders in innovation (Japan, South Korea and China) spend around 2-3 per cent of GDP on R&D. Most importantly, the share of private sector in total R&D spending in India is a mere 36 per cent while in China and Japan this is over 70 per cent. The major pillars of success of manufacturing in China, for instance, have been
Better infrastructure
Higher productivity growth
Big R&D spend on innovation
India must focus on improving productivity through investment in innovation and technology. It ranked 81 out of 141 countries in the Global Innovation Index 2015 while China ranked 29{+t}{+h}. In order to infuse a risk-taking culture, we need to focus on:
~~ Proper incentive mechanism through rewards and recognition
~~ Proper intellectual property rights (IPR) regime
~~ Skill development programmes for SMEs
~~ Higher education (technology in particular)
~~ Industry-institute partnership for technological development and innovation
India has a weaker IPR regime than those of other developed and emerging economies.
Rays of hope
There have been signs of business confidence and hope for attracting investments. Many global leaders in innovation and technology have shown interest in innovation in India. Samsung Electronics, the world’s biggest consumer electronics company, has three R&D labs in Bengaluru, Delhi and Noida. It has launched an innovation strategy called Make for India to create products based on insights from the Indian market. Chinese electronic company LeEco is also planning to set up an R&D centre in India.
French Finance Minister Michel Sapin, who visited India recently, said that French companies, known for innovation and creativity, are expected to invest almost $10 billion in India in the next five years. The foreign firms are looking to tap the Indian domestic market. To build infrastructure, Indian Railways has taken significant steps. It issued tenders for $7 billion for the manufacture of diesel and electric locomotives, which will have the world’s best technology, be most environment-friendly, and highly energy-efficient. There has also been a surge in foreign direct investments in the manufacturing sector.
The current business and political environment is more conducive to investments due to the lower interest rate, declining fuel prices, falling WPI, expected reduction in input costs and increase in domestic demand. While business leaders are optimistic about the state of the economy, it seems more a cautious optimism.
The case raised an important question: what should the road ahead be for India — manufacturing or innovation? To achieve sustainable, long-term economic growth in the manufacturing sector, with its consequent overall growth of the economy, manufacturing and innovation should go hand in hand.