29 Dec 2015 21:00 IST

India of the future: manufacturing powerhouse or innovation hub?

Make in India or Innovate in India — explain which policy you would advise the government to pursue

In September 2014, Prime Minister Narendra Modi announced the ‘Make in India’ initiative to make the country a global manufacturing hub and encourage domestic and multi-national companies to manufacture their products in India. While this initiative aimed to give India global recognition, it also sought to create employment opportunities for the country’s young people. With Make in India, the Centre aims to transform India — a nation comprising farmers, IT professionals, and call centre employees — into a manufacturing hub. The Centre pledged to train around 50 crore people in manufacturing by 2022.

 

Laws and infrastructure

In the past, several challenges had inhibited the Centre from growing India’s manufacturing sector. Some of these were lack of trained labour, stringent labour laws, and poor infrastructure. Unlike China’s flexible labour laws, India’s legal framework is restrictive and hurts investments in the manufacturing sector. For example, the Industrial Disputes Act (1947) has rigid provisions such as mandatory and prior approval from the government in the case of retrenchment, layoffs, and closure of industrial establishments employing more than 100 workers. The Trade Union Act allows even outsiders to be union office bearers, leading to strikes and lockouts without any legitimate grievances. While this has hurt investor sentiment, it has also restricted the growth of the economy, resulting in rising unemployment.

Poor infrastructure has also been a major deterrent to foreign investment in India. According to Shishir Sinha, research analyst for Frontier Strategy Group, a consulting firm focused on emerging markets: “Even though companies would enjoy manufacturing in India, given its large base of low-cost labour and engineers, it still takes way too long to acquire land, it is difficult to hire and fire labour, the taxation differs too much across the various States, and the lack of infrastructure makes the overall cost of production much higher. We need to see fundamental actions from the government to see action from the private sector.” In contrast, China has well-established infrastructure, global supply chains, manufacturing facilities, and the ability to scale quickly, Sinha added.

In addition to this, the lack of ease of doing business in India poses a huge problem for foreign investors interested in putting their money into the country’s manufacturing sector. According to the 2015 World Bank’s Ease of Doing Business report, India ranked 142 out of the 189 countries compared to 140 in 2014. The Centre has taken several steps to improve the ease of doing business by reducing the number of documents required for foreign trade and one can now apply online to get environmental clearance.

Industry responses

The Make in India initiative evoked a mixed response from several quarters. Kumar Mangalam Birla, Chairman Aditya Birla Group, showing confidence in India’s competitiveness, said: “India has come to be known as a global IT hub and a reservoir of intellectual capital. It’s high time India becomes a preferred centre of choice for manufacturing for global companies.” He added: “Quite clearly, in manufacturing we have lot of catching up to do. We need manufacturing to put the economy into a higher growth trajectory and to create millions of jobs.”

Gross Domestic Product (GDP) contribution from the manufacturing sector for the year 2013-14 for different countries is shown in the graph.



Some local businesses also remained optimistic about the prospects for further investment in manufacturing. For instance, Mangesh Kulkarni, who supplies car parts to foreign brands like Volkswagen, made $160,000 a year through contracts. He said though there was potential to expand his business to make products worth $ 2.4 million, he lacked the tools, experience, and knowledge to do so. He added: “The government strategy has not benefited local business until now. But if the government supports us and makes it a policy, it will definitely boost our local economy. It is survival of the fittest. Make in India is different from ‘made in India.’ But Make in India will boost the market because ultimately everyone needs financing.”

Global reception

The Make in India initiative was received well by foreign companies. In July 2015, Taiwanese multinational electronics contract manufacturing company Foxconn Technology Group announced that it plans to open 10-12 factories in India and create up to 1 million jobs by 2020. Other companies, such as the US automaker General Motors, Swedish telecom major Ericsson AG, and Japanese automaker Toyota Corporation also announced plans to invest in India.

However, several analysts raised doubts over the efficacy of India’s transformation into a manufacturing hub. According to Achyut Godbole, IT expert and writer: “The concept of Make in India is not bad, but it depends how it is implemented. Normally, global industries will want to invest in large industries that require technology.” He added that for the IT sector, the policy might lead to increased manufacturing of hardware but would not be of help to the software sector.

Many industry analysts were of the view that the idea of transforming the country into a manufacturing hub may result in short-lived benefits. According to them, as per historical and current trends employment in China’s manufacturing industry was hugely affected by mechanisation and competition from other economies offering cheaper labour. For instance, Foxconn’s decision to mechanise its manufacturing process resulted in layoffs in China. In another instance, American apparel and footwear maker Nike shifted its manufacturing base from China to Vietnam and Bangladesh since they offered cheaper labour.

The major challenge for India would be to compete with the likes of existing manufacturing hubs such as China, the Philippines, Indonesia, Vietnam and Bangladesh. Several contract manufacturers were moving their bases toward South-East Asian countries as wages in these countries are lower than those in China.

In August 2014, Foxconn announced plans to invest $ 1 billion to set up a manufacturing facility in Indonesia. Countries such as Japan, South Korea, Taiwan and Singapore were investing heavily in South-East Asia and shifting their manufacturing facilities from China. Indonesia is also promoting itself as the strongest low-cost destination in the world. Experts point out that the prime advantage these countries had was the basic infrastructure, which was crucial for the manufacturing sector to prosper. Also, the land and labour laws were more favourable in these countries than in India. Hence, India would have to catch up fast as the competition was likely to increase from other emerging countries such as Vietnam, the Philippines, those in Latin America, and South Africa.

Innovation and technology

Some industry observers pointed out that for several years, India had been a knowledge-driven economy focusing on innovation rather than on manufacturing. For the FY 2015, India’s technology and business process management sector (including hardware) recorded revenues of $146 billion compared with $118 billion in FY 2014. In addition to this, it was estimated that the service sector would contribute 62 per cent to India’s GDP by FY 2020.

 

Even Silicon Valley, home to several start-ups and global technology companies, actively promotes the culture of innovation and risk-taking rather than focusing on manufacturing. For instance, tech giant Apple shut down its Fremont manufacturing plant in 1992 and outsourced production to China because of cheaper labour. This led to huge cost savings for Apple. The sheer innovative power of America’s huge high-tech sector can also be seen in companies such as Google, Facebook, Lockheed Martin or Monsanto. Other economies have also understood the tremendous potential offered by innovation and are spending big on research and development. South Korean conglomerate Samsung Electronics’ R&D spend of $14 billion for FY 2014 put the company in the top spot in Bloomberg’s 2015 ranking of the world’s 50 most innovative companies.

Even in China, known as factory to the world, companies are investing in innovation and are outselling foreign firms in such areas as consumer electronics, Internet software and household appliances. For instance, Haier Group, the Chinese consumer appliances company, ranked first in the 2014 Global Appliances market. A survey in 2015 by PricewaterhouseCoopers revealed that Chinese companies are increasing their investments in R&D faster than their rivals in the market. The research debunked the perception that Chinese companies are mere copycats, focusing only on incremental innovations. It also stated that these companies could compare with firms in Silicon Valley in innovation. Data from the World Bank also showed that China’s R&D spend was 1.98 per cent of the country’s GDP in 2012, while India spent a meagre 0.9 per cent of the GDP on R&D for the same period.

Risk-taking culture

Some analysts believe India does not foster a culture of risk-taking and innovation. Gary Coleman, Managing Director (global industries) at professional services network company Deloitte Touche Tohmatsu Ltd says India does not have an entrepreneurial environment and that several factors hindered innovation. Coleman added: “I would say it is a combination of talent and a pro-business public policy. We did a survey of more than 7,000 millennials (those born between 1983 and 2000) and a majority said that in order to be an employer of choice, a company has to be highly innovative and have characteristics of innovation. They require that kind of environment. India also lacks some of that infrastructure and (faces) challenges when it comes to ease of doing business. These factors inhibit India from having a high level of innovation.” He suggested that more innovation centres and the growing number of R&D centres could ingrain a culture of innovation in India.

 

Some industry watchers pointed out that India does not value start-up culture, unlike the US, Australia, Canada, South Korea and the UK. Start-ups and entrepreneurs in these countries are able to get easy access to funds.

Moreover, the culture of risk-taking and innovation also supports start-ups. However, some observers feel that the growth in technology had boosted some start-ups in India. For instance, e-commerce start-ups such Flipkart and Paytm did achieve success in the country.

The challenge

Industry observers feel that the transition from a knowledge-driven economy to a manufacturing powerhouse is crucial for India as it is striving to boost its economic growth levels and create jobs for a population of more than 1.2 billion. Every year, over 12 million Indians enter the labour force. However, the country’s ambitions are threatened by acute shortages in power, ports, railroads and skilled labour. There is also a need to address tax and labour-related issues.

Industry experts suggest that India can become a manufacturing hub if the Modi government can resolve these challenges and provide a sustainable ecosystem to expand manufacturing in India. According to Sonal Varma, Chief India economist at Nomura: “While the ‘Make in India’ campaign is a step in the right direction, it will have to be followed up by more tangible measures such as building ports and highways, increasing power generation, and so on, to make India a manufacturing hub.”

On the other hand, Chief Economic Adviser to the Centre, Arvind Subramanian, says that Indian manufacturing as well as services are skill-intensive but the country has a pool of unskilled labour. According to Subramanian, India needs an unskilled-intensive high productive dynamic manufacturing sector like China and other South-East Asian countries. He believes that Modi’s Make in India initiative for unskilled manufacturing and skilled India for services should go hand in hand. He adds India could also develop complementary sectors, such as e-commerce, since it is poised to be a $150 billion sector by 2018.

Despite there being several challenges to India’s transformation into a manufacturing powerhouse, the country has set an ambitious target of increasing the manufacturing sector’s contribution to GDP from 16 per cent in FY 2015 to 25 per cent by FY 2025.

Now, if the Prime Minister formed an expert committee and you were part of that committee and were asked to share your views on what India’s focus should be — manufacturing or innovation — what would you suggest as a priority for the government? What steps should the government take to implement this priority?

You may gather additional information on the Make in India initiative and innovation in the country through secondary research.

This case study was developed at ICFAI Business School (IBS) by Hadiya Faheem (freelance case writer) and GV Muralidhara (Dean-Case Research Centre).

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