DRAFT

The National Strategy for Manufacturing

National Manufacturing Competitiveness Council Udyog Bhavan New Delhi 110 011

The National Strategy for Manufacturing

Contents
Section
1 2 2.1 2.2 2.3 3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 3.11 3.12 3.13 3.14 3.15 Introduction Manufacturing imperative Importance of manufacturing to Indian economy Competitiveness Components of manufacturing sector Challenges facing Indian manufacturing Creating conditions for growth, investment & employment Driving cost competitiveness and domestic demand Investing in innovations & technology Strengthening education & skill building Benchmarking against best practices Providing right market framework & regulatory environment Enhancing the role of Small & Medium Enterprises Enabling Public Sector Enterprises to meet competitive market conditions Infrastructure Development Importance of IPRs in the manufacturing sector Importance of IT in manufacturing sector Firm level competitiveness Role of State Governments Sub-sector engagement Creating a monitoring mechanism & measuring performance Way forward Key conclusions and recommendations Classification of Manufacturing Growth targets for 17 industry groups under Manufacturing (IIP) 63 - 64 65 49 - 62 12 - 48

Chapter

Page No.
15 6 - 11

4 4.1 4.13 ANNEX-1 ANNEX-2

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1. Introduction
1.1. Since 1991, the Indian economy is being progressively liberalized and its integration into the global economy is deepening. On the one hand liberalization and globalization have provided unprecedented opportunity for the growth and expansion of the industry in general and manufacturing sector in particular. On the other hand Indian industry today has to get

ready to face stiff competition from imports due to tariff reduction. Parallelly, the Indian Industry needs to improve its export capability through competitiveness.

1.2.

The average annual growth was 5.8% during 1980s and it was a little more than 6% during the 1990s. While contribution of agriculture to GDP decreased from 32% in 1991 to 22% in 2003, the contribution of services increased from 41% in 1991 to 51% in 2003. The contribution from

Industry had, however, remained stagnant around 27% of GDP between 1991 and 2003. The share of manufacturing sector within the industry

sector has shown only a marginal improvement from 16.6% in 1991 to 17% in 2003. In comparison in some of the East Asian economies the share of manufacturing ranged from 25% to 35% in their GDP. The manufacturing sector in India grew annually at an average of 6.3% during 1991 to 2003. Manufactured goods form about 75% of all exports from India.

1.3.

Indias share in the global trade is less than 1%, which is much below her potential. Five sectors viz., Gems and Jewellery, Textiles and Garments, Engineering Goods, Chemicals, Leather and Leather Goods account for

over 75% of Indias exports. The two trading blocks, US and EU, receive more than 50% of exports from India.

1.4.

Manufacturing has been recognized as the main engine for growth and accordingly emphasis was placed on growth of industry in most of our Five Year Plans. Manufacturing will remain one of the principal

means by which wealth is created. It is a matter of concern that the contribution of manufacturing to GDP has remained stagnant for over two decades since 1985. One of the major reasons for the low level of contribution has been Indias inability to build and maintain

competitiveness needed to meet the global challenges as well as to develop a larger domestic market through low cost production. The low levels of manufacturing growth had its adverse impact on employment generation.

1.5.

The current backlog of unemployment is more than 34 million.

It is

expected that over the next twenty years, the total proportion of workforce involved in agriculture is likely to decline from 56 per cent to about 40 per cent, and this would call for finding substantial non-farm employment opportunities. While service sector would provide high quality

employment opportunities it is likely to benefit only a fraction of the job seekers in these areas. A number of sub-sectors in services that are linked to manufacturing directly need to be concentrated upon as they provide substantial job opportunities. However, it is expected that

manufacturing has to carry the major burden of providing employment in the coming decades directly or indirectly for those coming from rural and agricultural sectors. To the extent that the growth of manufacturing sector creates strong multiplier effects for the growth of the services sector areas like traditional trading, banking, transport etc., the employment effect of manufacturing should be determined taking into account the indirect generation of employment in the services sector. It has to be recognised that the manufacturing sector plays a leading role in creating growth possibilities overall.

1.6.

Macroeconomic stability of the economy is essential for ensuring manufacturing competitiveness. Large fluctuations in economic

variables like output, employment and inflation add to the uncertainty for firms, consumers and the public sector, and can reduce the economys long-term growth potential. Therefore, it is important to maintain longterm economic stability through the Governments macroeconomic framework including proper monetary and fiscal policies to ensure sound public finances based on the principles of transparency, responsibility and accountability. This would enable to plan more effectively for the long term, improving the quality and quantity of investment in physical and human capital; and help to raise productivity and sustainable rates of growth and employment in the manufacturing sector in India.

1.7.

There is no denying that India possesses a comparative advantage in many respects. With its experienced work force, large pool of scientists, engineers and managers, reasonable endowment of natural resources and a large domestic market India has the potential to emerge as a major manufacturing hub for the global market. This can materialize quickly with improvement in the competitiveness of its Industry, because competitiveness is central to robust growth of manufacturing sector. Manufacturing sector is crucial, directly or indirectly, for providing jobs for the large work force entering the job market every year, particularly from the rural areas.

1.8.

The challenges faced by Indian manufacturers raise important questions for both industry and government. While industry has to grapple with problems within the Industry to maintain a competitive edge in a globally competitive environment, the government will have to create conditions that foster a healthy & competitive manufacturing sector including substantial additional investments for generating higher levels of growth. This calls for a breakthrough and bold thinking on the part of all stakeholders. Only bold aspirations can enable India to benefit from

emerging opportunities in the manufacturing sector.

1.9.

In the above background and in line with the priorities laid down the Government of India has set up the National Manufacturing Competitiveness Council (NMCC). This is an inter-disciplinary and autonomous body at the highest level to serve as a policy forum for

credible and coherent policy initiatives. The main objective of NMCC is to provide a continuing forum for policy dialogue and to energise and sustain the growth of manufacturing industries. The NMCC is expected to

suggest various ways and means for enhancing the competitiveness of manufacturing sector including identification of manufacturing sectors which have potential for global competitiveness; current strengths and constraints of identified sectors, and recommend National level industry/ sector specific policy initiatives as may be required for augmenting the growth of manufacturing sector. implementation of the strategy. The council will also help in the

1.10.

In order to achieve these objectives, the NMCC is pursuing a two-pronged approach. First to prepare a National Manufacturing Strategy Paper to identify the areas of policy that are to be addressed and the Second, in the meantime, proceed with detailed study and make recommendations in respect of sub-sectors of manufacturing that are assessed to have immediate potential for growth and employment.

1.11.

The issues confronting the manufacturing sector are varied and cover a vast area. It spans the entire gamut of the Indian economy and the need for enhancing competitiveness, productivity and employment generation is important for growth. In order to attain competitive edge in The

manufacturing the constraints being faced have to be mitigated.

generic issues such as lack of proper infrastructure, higher transaction costs, higher interest rates, inadequate power availability and other regulatory issues are being addressed by NMCC in detail for which further studies if required and elaboration needs to be done. Simultaneously, sub-sectors of manufacturing are being addressed in sub-group meetings of NMCC and separate action plans are being prepared and monitored. A strategy for phasing of the implementation plans and deliverables comprising of both generic issues and sub-sector engagements into long term, medium term and short term needs to be done based on their potential to yield results and an assessment of their feasibility.

1.12.

This paper - The National Strategy for Manufacturing attempts to identify the areas of policy and outlines the strategic directions that need to be

pursued in order to realize higher levels of growth and employment. These steps are the start of a process and not the end. Section 2 of the paper details the manufacturing imperative and Section 3 enumerates challenges facing Indian manufacturing along with certain strategy prescriptions. Section 4 lays out the way forward for the further work to be done to realise the goal of sustained growth of manufacturing.

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2. Manufacturing imperative
2.1.
2.1.1.

Importance of manufacturing to Indian economy

India has to aim at achieving a long term growth rate of GDP of 8 to 10 per cent to substantially improve the living conditions of its masses. The mid-term appraisal of the Tenth Five Year Plan (2002-2007) carried out by the Planning Commission in March 2005, however, observed that the overall GDP growth rate for the Plan as a whole is unlikely to exceed 7 per cent during this period. Given the projected trends, a growth rate of 8 per cent plus would not be infeasible for the period 2007-12. Notwithstanding the low base in 2002-03, the GDP growth of 8.5% in 2003-04 is significant. Similarly, the GDP growth of 6.9% in 2004-05, given the high base in 2003-04 is noteworthy. Looking at the potential of the economy to aim at a long term growth rate of 9 per cent appears reasonable. A GDP growth rate of 9 per cent would mean that the

Industry as a whole would have to grow on a sustained basis at about 10 per cent and that the Manufacturing component in it at 12 per cent per annum.

2.1.2.

The issue is what sectoral growth rates can ensure a 9% real GDP growth?. GDPs sectoral composition has agriculture, industry and

services components. Pure agriculture and allied activities (excluding mining and quarrying) account for 22.1% of GDP 1 . The historical trend for growth in this sector has never been more than 3%. Even if one assumes that an optimistic rate of 4% is achieved, with a share of
Economic Survey 2004-05 points to a further decline in agricultures share of GDP to 21% and a decline in work force employed in agriculture to 57% (1999-2000).
1

22.1%, this would contribute 0.884% to GDP growth.

In case of

services sector, a trend growth of more than 10% is unreasonable and with a share of 51%, this would contribute 5.1% to GDP growth. Therefore, achieving a 9% GDP target would still require a 3.016% contribution from the Industry sector. With a contribution of 26.9%

(including mining and quarrying), the industry sector needs to grow at 11.21%. Even though industry sector includes components of (i) mining and quarrying, (ii) manufacturing, (iii) electricity, gas & water supply and (iv) construction, manufacturing alone accounts for a weight of 79.36% 2 in the IIP index. An average growth of 6% in the other three

components of industry requires manufacturing to grow at 12.26%.

2.1.3.

It is felt that vigorous pursuit of reforms in agriculture sector through an end-to-end approach where production and productivity patterns are tied up with markets and end users would drive investments needed for irrigation, post-harvest infrastructure, processing and value addition, etc. This would also result in expansion of rural markets and enhance opportunities for manufacturing & employment. Making agriculture more efficient will raise purchasing power and over time, allow large scale movement of workers into other parts of the economy.

2.1.4.

Off-shoring of manufacturing activities to low cost countries can be significant and India can reap part of this dividend 3 . In the past, India missed opportunities in outsourcing of manufacturing although India has an outstanding record in the areas of software. The global trend of outsourcing parts of manufacturing value chain to low cost destinations is in favour of countries like India.

2.1.5.

It is estimated that nearly 10 million people will join the workforce annually and would require to be provided with employment. In this context, it needs to be noted that the present growth pattern led by high service sector growth and a stagnant manufacturing sector is leading to a rural-urban divide. The solution to provide jobs to the millions joining the workforce can only be through a robust revival of manufacturing

2 3

As a weight in the index of industrial production. Made in India the next big manufacturing export story, CII-McKinsey, October 2004.

sector which can match the rapid growth performance of the services sector.

2.1.5.1. It is estimated that India needs to create 7-8 million new jobs each year outside agriculture just to stay at its current unemployment level of 7 per cent. Manufacturing jobs are ideal for workers transiting out of agriculture. The revival of manufacturing can create close to 2.5 million new jobs each year as opposed to one million jobs created each year over the last decade. 2.1.5.2. Manufacturing is a force multiplier. It creates productive employment, promotes agriculture and service sector and spins a cycle of wealth creation. Investments in manufacturing produce a Keynesian multiplier effect on GDP growth to the tune of four times in India as every rupee invested adds four rupees to GDP. 2.1.5.3. Manufacturing provides an array of products to end users for fulfilling not only basic needs but to improve the standard of living.

2.1.6.

Small Scale Industry, comprising of 114 lakh units has been a significant contributed to the manufacturing by accounting for nearly 40% of total industrial production.

2.1.7.

The quest for competitiveness at firm level might result in reduction of employment to begin with. But overall increase in competitiveness in

the sector in which the firm operates would lead to enhanced opportunities that not only drive demand but also generate employment through the spread effect. There are also sub-sectors which are good employment generators while being competitive.

2.2. Competitiveness
2.2.1. International competitiveness is really a multi dimensional concept, dependent upon three main sets of factors - all taken together. viz.,

2.2.1.1. Country specific advantages - related to technological, financial and other infrastructural status of the economy vis--vis those of the highly developed economies where major competitors are located.

2.2.1.2. Industry specific advantage - related to the type of industry where competitiveness is also affected by various fiscal and monetary policies which can change from time to time. 2.2.1.3. Enterprise specific advantages - related to a particular company, like the ability to acquire, assimilate, develop new technologies; capabilities to reduce production costs; cut down delivery cycles; enhance quality & productivity and after-sales-service etc.

2.2.2.

At a very broad level, some indications of competitiveness can be obtained from Global Competitiveness Report (GCR), published by World Economic Forum 4 (WEF). This has a Growth Competitiveness Index (GCI) which captures an economys capacity to grow in the future. GCI builds on three pillars of (i) macroeconomic environment, (ii) public institutions and (iii) technology. While the report is not about

manufacturing competitiveness alone, manufacturing does form an integral part of the rankings. While Finland with a GCI score of 5.95 ranks 1st among 104 countries in 2004-05, India with a GCI score of 4.07 ranks 55th compared to its score of 3.90 in 2003-04. The values of GCI are a better indication of

2.2.3.

movements than ranks. On the three pillars mentioned above, following have been the scores: Rank in 2004-05 out of 104 countries 63 53 52 Score in 2004-05 3.72 4.45 4.05 Score in 2003-04 3.68 4.26 3.75

Technology index Public Institutions index Macro-economic index

Since 1979.

What is required through good reforms is to improve our values of GCI in order to enable competitiveness vis--vis other countries.

2.2.4.

What is pertinent to note is that countries or economies dont compete. It is companies that compete. Therefore, government policies need to provide the enabling environment within which companies are able to compete.

2.3. Components of manufacturing sector

2.3.1. The basic classification of manufacturing as per UN systems International Standard Industrial Classification (ISIC) and Central Statistical Organisation (CSO) is at Annex-1.

2.3.2.

Between 1993-94 and 2003-04, the annual average real rates of growth which yielded a real GDP growth rate of 6.24% were: 2.66% for agriculture (excluding mining), 5.41% for non-manufacturing industry, 6.92% for manufacturing industry and 8.03% for services,

2.3.3.

Among the major contributors to the GDP in 2003-04, industry with a share of 27% comprised of manufacturing which contributed 17% to GDP and non-manufacturing (mining and quarrying; electricity, gas and water supply; construction) which contributed 10% to GDP.

Manufacturings share is a function not only of manufacturing growth, but also of growth in the other sectors.

2.3.4.

It could reasonably be assumed that over the next 20 years the share of services in GDP could go up to 60%, share of agricultural in GDP could go down to 10% and the share of non-manufacturing component of industry in GDP would be at least 10%. manufacturing contribution in GDP at 20%. This would leave

2.3.5.

The historical trend shows that it has taken more than 20 years to increase the manufacturing share in GDP by five percentage points to

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around 17%. Trend growth rate in manufacturing over the last ten years has been around 7% and the desired growth rate over the next decade is 12%. Given manufacturings present share of 17% of GDP, the

difference between 7% and 12% translates into 0.9% incremental GDP growth. On this basis, at best the share of manufacturing in GDP could be 23% by 2015.

2.3.6.

An overall or aggregate target of 12% growth, needs to be decomposed or disaggregated according to manufacturing sub-sectors. For instance, in the index of industrial production (IIP), there are 17 industry groups at the 2-digit level of classification 5 based on the National Industrial

Classification (NIC). Based on the manufacturing sector performance in 2003-04 and 2004-05, the table at Annex-2 shows aspirational growth targets for the 17 industry groups ranked in descending order. As the table shows, 10 per cent growth rate in manufacturing is within the realm of possibility and aspirational target of 12 per cent can be achieved by sustained implementation of various elements discussed in section 3 of this paper.

IIP only covers 80% of manufacturing.

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3
3. Challenges facing Indian manufacturing
3.1. Creating employment
3.1.1. While government policies would influence the market environment in which the businesses will operate, the growth of manufacturing sector is dependent to a large extent upon the role played by the industry themselves. The Industry would not only need to think big in terms of scale but also need to :

conditions

for

growth,

investment

&

invest in R&D and technology, have a continuing commitment to skills development & education, benchmark their performance against the best in class, adopt best manufacturing practices & production techniques, and deliver on globally acceptable quality levels.

3.1.2. The extrapolations by Goldman Sachs in their BRIC report on Brazil, Russia, India and China 6 makes the point that in the period leading up to 2050, India alone, among the BRIC countries, is unlikely to face a labour constraint. A labour shortage in developed countries means

scope for immigration or for outsourcing manufacturing activities. The next wave of off shoring is expected to take place in skill-intensive industries and India has an advantage in this segment. Further, global
Dreaming with BRICs: The Path to 2050, Dominic Wilson and Roopa Purushothaman, Global Economics Paper No. 99, Goldman Sachs, 1st October 2003. There have been two subsequent followup BRIC reports also.
6

12

buyers are increasingly recognizing the perils of single county sourcing and are looking at alternatives to their existing sources. There are

enormous opportunities for India in this context which needs to be accelerated through greater showcasing of Indias competitive

advantages and through wider participation of Indian firms including the SME sectors in the global value chains. 3.1.3. The National Sample Survey (NSS) held in 1999-2000 7 shows a labour force of 363 million and a workforce of 336 million, with an unemployment rate of 7.32% and number of un-employed to be 26 million. The work force of 336 million comprised of 190 million in agriculture, 59 million in industry and 86 million in services. The survey points to a slowdown in the annual average growth in employment. While the average annual growth rate in employment was 2.89% between 1983 and 1988 and 2.50% between 1987 and 1994, it was 1.07% between 1993 and 2000. The history of development is one of pulling people out of agriculture, into non-farm activities, into manufacturing and into services, not retaining them there. If 10 million new jobs have to be created a year, manufacturing has a major role to play.

3.1.4. Within industry, the employment in manufacturing was 40 million in 1999-2000. Between 1993-94 and 1999-2000 the employment elasticity in manufacturing was 0.33 as compared to 0.59 during the period 1983 and 1988. Manufacturing would need to grow at 12% p.a. compared to the trend growth rate of 7% achieved during the last decade in order to create 1.61 million employment with present employment elasticity. If the employment elasticity were to improve to the

earlier higher level of 0.59, the 12% growth in manufacturing would result in 2.9 million new direct jobs per year in manufacturing sector alone. Hence it is recommended that an aspirational growth rate of 12% in manufacturing sector should be aimed at along with its contribution to GDP at 23%. These are figures on direct job

Large NSS surveys are roughly held at five-year intervals. Before 1999-2000, the last one was in 1993-94.

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creation. In addition, indirect jobs would be created as a result of multiplier effects 8 .

3.1.5. Therefore, in order to achieve a 12% growth rate, It is essential that a thorough review of the past policies which discouraged growth of manufacturing is undertaken and recommendations arrived at to rectify and improve conditions that not only encourage growth but also bring in investment and generate employment potential. Towards this, the policy framework shall encourage manufacturing sector to become competitive by allowing it to build up global scale of operations and also enable financial institutions to finance such projects. Further, it should also be able address issues such as risk management and debt restructuring faced by companies.

3.1.6. Large scale investment, both domestic and foreign would have to be attracted into the manufacturing sector to enable high-levels of growth envisaged.

3.1.7. It is also essential that in order to be globally competitive, the manufacturing sector needs to be modernized through infusion of modern technologies.

3.1.8. There is also a need for the Manufacturing Sector in India to design, produce and offer at affordable prices products suitable for Indian conditions and appropriate for people at the bottom of the pyramid. This large potential market still remains to be exploited and can be serviced by creating a competitive manufacturing sector which can meet the demand from this section of the society.

3.1.9. What are the constraints in pushing up manufacturing growth still further? The constraints themselves suggest the solutions. Some of the constraints are generic in the sense that they cut across all manufacturing sectors. specific sectors. The others are more specific and pertain to

CII-McKinsey Report suggests two to three times the direct figure.

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3.2. Driving cost competitiveness and domestic demand

3.2.1. Recent studies have shown that India suffers on competitiveness due to various factors such as: higher import duties including inverted duty structure higher incidence of indirect taxes sub-optimal levels of operations lower operational efficiencies higher transaction costs lower labour productivity higher cost of capital inadequate infrastructure

3.2.2. One such study 9 points to the Chinese products being lower in cost by 30% in general in comparison to Indian products inspite of similar labour and other input costs. Further, Total Factor Productivity (TFP) comparisons establish that productivity of Indian manufacturing 10 is about one-fifth of US levels and about half the levels in Taiwan and South Korea.

3.2.3. Indian manufacturing would be competitive only when the cost of manufacturing is low. Further, scaling up of operations would be difficult to achieve without a strong domestic demand and policies for enhancing domestic demand must be expeditiously considered as this would also drive an increased share of manufacturing in the economy. While one can comment about variables included (or excluded) and the methodology used in Global Competitiveness Report (GCR), there ought not to be any great debate about the heads that aid or constrain manufacturing competitiveness. Therefore, lowering cost of

manufacture and improving quality in India should be one of the prime focus areas to work upon in the council.

10

Learning from China to unlock Indias manufacturing potential, CII-McKinsey Report, October 2002. Making Indian Manufacturing Globally Competitive, ACCENTURE

15

3.2.4. For stimulating domestic demand, while the focus could be on reducing indirect taxes and import duties, following generic heads need attention:

3.2.5. Import duties

3.2.5.1. The argument that import duties need to be reduced is usually advanced when items imported are raw materials and intermediates and not finished goods. The Kelkar Task Force 11 recommended a four-tier import duty (that is, for manufactured goods) structure in 2006-07 5% for basic raw materials (coal, ores and concentrates, xylenes, etc.), 8% for intermediate goods (capital goods, basic chemicals, metals, etc.), 10% for finished goods other than consumer durables and 20% for consumer durables. It is evident that the peak import duty will be no more than 10%. In the interest of a stable policy regime, it is recommended that stage wise downward duty reductions should be calibrated so that the Indian Industry gets time to readjust to the trend.

3.2.5.2. Added to that a plethora of Free Trade Agreements (FTAs) outside the WTO system, which invariably involve manufactured products, with eventual zero duties. Some of them have given rise to inverted duty structures which needs to be addressed. The policy problem is the following. Should we standardize or should we attempt to differentiate? And as long as we resist reduction of general import duties, the FTA problem will remain. However the inverted duty structure caused by FTAs need to be minimized.

3.2.5.3. While the basic customs duty may be zero, imported products should face duties equivalent to domestic indirect taxes paid by domestic manufacturers. The countervailing duty (CVD) is meant to be precisely this, but is presently only equal to central excise and ignores State-level sales tax and other local levies. The

2005-06 budget has a provision for an additional CVD of 4%, but

Report of the Task Force on Indirect Taxes, Ministry of Finance and Company Affairs, December 2002.
11

16

that is presently restricted to IT products.

Unfortunately, this

reform gets linked with reform of the domestic indirect tax system.

3.2.5.4. Continuation of inverted duty structure in certain cases is a cause for concern and needs to be addressed.

3.2.6.

Domestic indirect taxes

3.2.6.1.

Domestic indirect taxes are often singled out as a major reason why Indian manufacturing is uncompetitive. For instance, many studies argue that total taxes on manufactured goods are 25 to 30% of the retail price in India, compared to 15% in China. Indirect taxes contribute 50% to the difference in retail prices between India and other low-cost countries. Lower duties would have boosted the domestic market and permitted synergy (exploitation of economies of scale, attracting FDI) between domestic and export markets.

3.2.6.2.

Reforming indirect taxes is also contingent on reforming direct taxes. In 2004-05, total tax revenue is 10.2% of GDP, if one includes Central taxes alone. 12 If state and local level levies are added, then the figure is more like 15%. Given expenditure

commitments and demands on the government, this ratio probably needs to be 3% more as share of GDP. Ministrys Task Force on implementation of the Finance Fiscal

Responsibility and Budget Management (FRBM) Act, 2003 also argues that fiscal consolidation will primarily have to occur via the revenue route rather than the expenditure contraction route. 13 Central tax revenue as a share of GDP has stagnated at around 10% (sometimes even 9%) of GDP since 1990-91. FRBM

projections visualize an increase to 12.96% in 2008-09, provided that tax reforms take place. The simple point is that the indirect
Economic Survey 2004-05. Implementation of the Fiscal Responsibility and Budget Management Act, 2003, Report of the Task Force, July 2004.
13 12

17

tax contribution to GDP must also increase. The argument for reducing multiplicity and increasing transparency should not be confused with a drop in this share.

3.2.6.3.

The broad shape of indirect tax reform is clear.

Indirect tax

reform will perhaps work only if all exemptions are terminated over a period of time viz. product-specific exemptions, SSI exemptions, location-based exemptions. Further, as per the

FRBM, the total tax burden on most goods by Centre and States would in any case it may not go below 20 %. There should be an all India combined Goods and Service Tax (GST), with service sector taxation integrated into the VAT framework instead of being a tax on turnover. This should be accompanied by a withdrawal of all other taxes like central excise, central sales tax, octroi, State-level sales tax, entry tax, stamp duties, transportation taxes and so on. However, under the given Constitutional framework the

comprehensive tax on goods and services would be difficult and it would be better to talk of a national VAT that would run in parallel at both and Central and State levels achieving at the same time the same objectives of the GST.

3.2.7. 3.2.7.1.

Export incentives/export subsidies Sustained export growth is crucial for maintaining and

accelerating the GDP growth momentum. Export subsidies involve differential treatment to exports as compared to sales in the domestic market and are in general WTO-incompatible, although there are some exemptions for India. Export incentives are WTO-compatible, as they involve reimbursements (such as DEPB, DECG, Target Plus and Duty Drawback Schemes) or waivers (advance licensing scheme) for duties paid in exported products. Export procedures continue to be cumbersome because of procedures connected with export

incentives/subsidies. Implementation of both DEPB and duty drawback will become simpler if there is a complete VAT system.

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3.2.7.2.

With liberalization across the board, liberalization in selected enclaves (EOUs, SEZs and AEZs) has become somewhat irrelevant. If customs duties have come down and are going to drop further, what is the added attraction of these schemes, especially if there are going to be restrictions on sales in the domestic tariff area (DTA)? Quite often, debates about

SEZs/AEZs vis--vis EOUs are about equal treatment in sales to the DTA and about concessional customs duties on such DTA sales. With import duties declining, restrictions on DTA

sales need a relook in order to ensure competitiveness. Further, it is suggested that the concept of economic regions with world class infrastructure but with no fiscal concessions could be considered.

3.2.8. FDI and procedures

3.2.8.1.

Foreign investments mean both foreign portfolio investments and foreign direct investments (FDI). FDI brings better technology and management, access to marketing networks and offers competition, the latter helping Indian companies improve, quite apart from being good for consumers. This efficiency

contribution of FDI is much more important. FDI inflow figures are 3.40 billion US dollars in 2001, $ 3.45 billion in 2002, $ 4.27 billion in 2004 and $7.5-8 billion in 2005, there being a gap between approvals and inflows. This is still a far cry from Chinas $ 53.51 billion in 2003 and the target of annual FDI inflows of $ 10 billion a year. As per the UNCTAD FDI performance index, Indias FDI ranking was 114th out of 140 countries 14 in 2002-03 in a large country like India, FDI as a share of GDP may not be very high and barring certain sectors, FDI as a share of total investments will also not be very high. But there is no denying that India has under-performed and there is a need to attract FDI as it is a catalyzing factor for growth.

14

World Investment Report 2004, The Shift Towards Services, UNCTAD, 2004.

19

3.2.8.2. There are procedural problems at all three levels of an enterprises functioning entry, functioning and exit, although foreign investors often tend to focus on the first. The expression transaction costs is sometimes used and such an expression also subsumes under it costs associated with inadequate infrastructure. A recent World Bank report benchmarks Indias transaction costs with some other countries in the world. 15 According to this, it takes:

89 days to start a business in India, compared to 41 days in China.

67 days to register property in India, compared to 32 days in China.

425 days to enforce contracts in India, compared to 241 days in China.

10 years to complete insolvency proceedings in India, compared to 2.4 years in China.

According to the latest World Bank Report 16 India is ranked 116th and China 91st among the 155 economies studied on the ease of doing business.

3.2.8.3. Conversion ratios (percentage of approvals converted to inflows) vary widely across States because of the fact that different States did not implement procedural reforms uniformly. 3.2.8.4. Some of the procedures at the State government level where appropriate reforms are necessary include:

Providing the necessary investment climate for the growth of manufacturing in the states

Providing infrastructure, particularly in respect of power, water, roads, etc.

15 16

Doing Business in 2005, World Bank, IFC and Oxford University Press. Doing Business in 2006, World Bank, IFC and Oxford University Press.

20

Development of a common format for computerization of required records.

Doing away with multiplicity of inspections by large number of inspectors.

Farming out to recognized private agencies, various inspections.

3.2.9. Interest rates

3.2.9.1.

High interest rates and availability of credit are problems which hinder growth of Industry. Whichever index one uses to measure inflation, annual inflation is around 6% now. With a PLR of

10.25%, this means a real rate of interest of 4.25%. Thus in a capital scarce country, real interest rates will never be as low as global interest rates, although this is qualified by the

harmonization that has taken place between global and domestic interest rates. Some parts of the Indian corporate sector are now allowed to borrow globally, though not all. Therefore, the

importance of good macro-economic management to contain interest rates needs to be realised.

3.2.10.

Labour laws

3.2.10.1. With the focus on creating an enabling environment that encourages new employment as a result of increased growth in various constituents of the manufacturing sector as well as skill development/ upgradation to enable such a growth to happen, it is essential to look at various labour related issues. 3.2.10.2. Labour law reform is usually equated with Chapter V-B of the Industrial Disputes Act (IDA), but the issues are more complicated. Subject to the caveat that labour is on the

concurrent list of the Constitution, there are 45 Central Acts and 16 associated rules that deal directly with labour. There are

others that indirectly deal with labour, like the Boilers Act (1923), the Collection of Statistics Act (1953), the Dangerous Machines (Regulations) Act (1983) and the Emigration Act (1983). There is

21

thus an issue of unification and harmonization. Reforming labour law has many dimensions and issues.

3.2.10.3. It is no one's case that welfare provisions should not exist. Each labour legislation has a separate inspector and visits of inspectors are not synchronized across all labour enactments. Barring the Payment of Wages Act, where a maximum period of three years is stipulated, no other labour statute prescribes a maximum period for which records and registers must be maintained. Compliance thus becomes difficult. This system is not distributionally neutral as it tends to hurt the small-scale sector much more than it hurts large-scale industry. One view is that the existing labour laws by encouraging industry to go for contract labour are proving to be antithetical to the interest and welfare of labour.

3.2.10.4. Three statutes that impinge on industrial relations are The Contract Labour (Regulation and Abolition) Act, 1970, The Trade Unions Act, 1926 and The Industrial Disputes Act, 1947.

3.2.10.5. The Contract Labour (Regulation and Abolition) Act, 1970 was never meant to prohibit contract labour. Section 10 provided the appropriate Government the discretion of prohibiting contract labour in selected areas. The Contract Labour Act allows flexibility and permits outsourcing. However, a few court judgments have affected this flexibility. It is recommended to retain the 1970 Act and tighten up Section 10 so that ambiguity about continuance of contract labour and absorption following abolition is removed.

3.2.10.6. In

respect

of

The

Trade

Unions

Act,

1926

following

recommendations of the Second Labour Commission, the government has introduced amendments to the Act. The number of persons required for registration of a trade union will change from seven to 10 per cent of the labour force. Not more than one-third of office bearers (subject to a maximum of five) can be

22

outsiders. And the holding of annual elections and auditing of accounts will be mandatory.

3.2.10.7. In The Industrial Disputes Act (IDA), 1947 following is a list of sections which require a re-examination - Section 9-A, Section 11, Section 11-A, Section 17-B, Sections 22/23 and Chapter VB/Sections 25-K, 25-L, 25-M, 25-N and 25-0. The argument about Chapter V-B of IDA is indeed a valid one. The provisions of the Act make recourse to the government and thus to Labour Commissioners, mandatory. Unless this rigidity in labour

markets is removed, higher growth will not necessarily translate into greater employment. What is involved is not primarily an exit policy for labour. The statute makes it impossible for companies to exit. It is recommended that given the other provisions of labour legislation, the requirement of governmental

permission can be dispensed with, without adversely affecting the interests of labour. Competition cannot

function without free exit. Hence it is suggested that while a consensus on Chapter V-B is being arrived at, the need is for quick amendment of the other sections of IDA and implementation of other labour law reforms.

3.2.10.8. If the recommendations of the Second National Commission on Labour submitted in 2002 are implemented, they will harmonize labour laws under five heads of industrial relations, wages, social security, safety and welfare and working conditions. While flexibility will improve in the

organized labour market, there will simultaneously be better social security provisions in the unorganized one.

3.2.10.9. While the focus is on dealing with Labour laws to make them growth friendly, there is no denying that Labour productivity which is normally sector specific needs to be constantly improved in order to sustain competitiveness.

23

3.3. Investing in innovations & technology

3.3.1. Investing in innovations is one of the pre-requisites to attain global competitiveness. The experience of the industry has been that being low-tech does not make them globally attractive. Investing in R&D by the corporate and by the government to adopt technology ahead of markets should be encouraged.

3.3.2.

For this purpose it is recommended that:

3.3.2.1.

Existing policies relating to R&D funding, incentives for supporting generic technologies, engineering and physical sciences should be reviewed and steps taken to encourage better coordination of efforts and greater focus on

innovation and productivity enhancing technologies. 3.3.2.2. Priorities should be established for support of advanced manufacturing technologies. 3.3.2.3. The need for creating a coordination mechanism on Manufacturing pursued. 3.3.2.4. Support Prototype development and design innovations through fund sharing/ enabling establishment of references, etc. 3.3.2.5. Create common testing facilities and centres of Research and Development should be

manufacturing technology excellence. Management of these by the beneficiaries themselves would encourage the Indian manufacturing industry to invest in innovations, 3.3.2.6. Strengthen the Intellectual Property Rights framework by providing necessary infrastructure and human resources particularly in the case of the Patent and Trade Mark systems to encourage more Patenting and Trade Mark registrations.

24

3.3.2.7.

Establish Technology parks on the lines of those existing in USA

3.3.3.

In critical areas, in addition to tax relief measures on R&D expenditure enhanced government funding of research & development activities becomes crucial to support the efforts of the manufacturing sector, especially if innovation and R&D is to form the basis of building comparative advantage. This would call for sector wise study of technology status and building a future model for R&D support by the government, especially in the areas of emerging technologies which have the potential to transform products, processes and services. Attention is required to be paid to incentivisation of R&D in National R&D to Laboratories and provide greater market R&D. The merger or

orientation

Government

funded

consolidation of national technology institution in similar areas of work also requires consideration in order to derive synergy and economies of scale.

3.3.4.

Current business realities may call for technology acquisition as an alternate strategy. Hence, it is recommended that a Global Technology Acquisition Fund be set up, which would enable Indian industry to acquire very high technology intensive companies abroad, when ever such opportunities arise. Framework for administering such a fund needs to be separately worked out. This would also incorporate a national knowledge management centre with a technology-tracking cell.

3.3.5.

Specific needs of small businesses need to be attended to. Small Business innovation Research and Small Business technology transfer focusing on Manufacturing need to be addressed. The

unique capabilities of the National Laboratories and the IITs and other Technical Institutions need to be leveraged to benefit the Small and Medium Manufacturing Industries. 3.3.6. Special incentives may also be provided for Innovation and Development of products which has an appeal for the larger section of Indian society.

25

3.4. Strengthening education & skill building

3.4.1. Isolation of education (even training) from the production sector is the basic flaw of Indian system. For the Indian manufacturing to be globally competitive, it needs to attract the best brains. In spite of surplus graduates in popular engineering streams, deficits were witnessed in computer, metallurgy, mining, sugar, paper, leather and rubber technology between 1997 and 2002. Serious mismatch is observed

between the needs of the Industry and the availability of skilled engineers and technicians for Manufacturing Industry. Conditions of

service in the manufacturing areas should be improved to attract better candidates to this area of operations.

3.4.2.

Hence, it is recommended that a close interaction is initiated between academia-industry-government for creating Centres of Excellence in manufacturing technologies. The quality of

Technical education at the vocational level as well as the University level needs to be addressed. Special focus needs to be given to issues relating to the emerging requirements of Industry while designing the syllabus by these institutions. A concerted national initiative is required to be taken to revise the curriculum at degree and diploma levels for all technical courses to keep in step with the changing requirements of the Industry.

3.4.3.

Skill development is important especially for the manufacturing sector. If Indian manufacturing has to meet its aspirations, it will require to produce 1.5 million technically skilled people every year in order to meet the incremental requirement of 20 million skilled technicians by 2015 16 . As the country moves up the technology ladder and begins to produce more complex products in greater volumes, manufacturers will require workers able to use judgment and other thinking skills in the operation of advanced manufacturing processes and in the maintenance and repair of complex automated production equipment. Hence, qualitative growth

16

CII-McKinsey Report Made in India

26

in skilled manpower is considered essential. deliver these skills?

The issue is, who will

3.4.4.

Any effort to improve human capital has to take into account the needs of not only the domestic market but also the increasing opportunities in the global market. The public sector driven initiative, through the Apprentices Act and ITIs (Industrial Training Institutes) has not been able to keep pace with changing requirements. The upgradation of the Industrial Training Institutes should be pursued vigorously through public-private partnerships, if not outright private sector provisioning, with training authorities de-linked from certifying ones. It is

recommended that:

3.4.4.1.

Rationalize the complex procedures for changing curricula and course syllabi to enable institutes keep pace with developments in technologies.

3.4.4.2.

Encourage the private sector to establish and operate demand driven technical training centres through financial and other incentives, under a carefully designed industrymanaged, and government supported, quality control and accreditation system.

3.4.4.3.

Develop a comprehensive National Vocational Education Qualification System and set up Vocational Education & Training Institutes in each State. In addition large private sector manufacturing/ engineering organizations must be encouraged to adopt Vocational Education Institutes

through appropriate schemes.

3.5. Benchmarking against best practices & breakthrough thinking

27

3.5.1.

Adoption of global best practices in manufacturing is another area which requires attention for ensuring sustainable competitiveness.

Benchmarking and standard setting has to begin from building the human resource and extended to the entire value chain. In this context, all organizations should collaborate in the development of relevant sub-sector data bases that could help the industry to benchmark and measure itself against the best in class performances. A Manufacturing Advisory Service should be established to deliver practical help to manufacturing SMEs.

3.5.2.

A paradigm shift in manufacturing sector can be achieved, if manufacturing is not just viewed as a process in the factory, preceded by design and followed by sales but as a new way where R&D is as critical a component of product design to supply chain management and customer relations 17 . Conceptually, it is a movement from products to architecture (concept: classification based on the system of production) where sector wise competitive advantages can be derived. It is recommended to set up a group to study the concepts and applicability of manufacturing architecture 18 (integral vs. modular) as relevant to the Indian conditions and take suitable policy initiatives.

3.6.

Providing right market framework & regulatory environment

3.6.1.

Access to technology, larger investments that drive exploitation of economies of scale and scope, accessing market information and so on are in the private domain, although there is often a tendency to expect the government to provide or subsidize these efforts. But given fiscal and other limitations, there are constraints on what the government can effectively do. However, further work towards providing the right market framework and regulatory environment that provides impetus to the manufacturing sector is essential.

17 18

Shoji Shiba, Professor emeritus of University of Tsukuba Prof. Takahiro Fujimoto, University of Tokyo

28

3.6.2.

The frame work would, need to ensure fair competition, better access to markets both domestic and foreign, trade negotiations that ensure a level playing field for domestic manufacturers, review of existing regulations and reduce the burden of paperwork and inspector raj in respect of existing Laws, promote sub-sector wise policy on regulation and examine the issues relating to regulatory accountability.

3.6.3.

One of the areas impacting the industry includes procedures related to compliance with environment & safety regulations. In this respect, it is recommended that on the lines of financial audit firms, certain special institutions or firms of reputation specifically in the area of environment & safety could be identified to carry out necessary certifications. The recommendations of the high powered committee 19 set up for improvement in the extant procedures for investment approvals and implementation of projects and for simplification of the procedures for both public and private investments needs to be implemented.

3.6.4.

3.6.5.

Enable Consolidation of regulatory frame work by weeding out legislations that have outlived their utility, bringing others in line with the present day technological, environmental, competitive and social requirements to make the administration as well as
compliance, effective.

3.6.6.

Transformation of regulatory processes through re-engineering of procedures to reduce discretion through clear cut rules,

rationalising approval/permission requirements of manufacturing industries, optimizing inspections by Regulatory Authorities etc. needs to be done to minimize the transaction costs to the manufacturing sector.

Report on Reforming investment approvals and implementation procedures, Dept. of IPP, November 2002.

19

29

3.7. Enhancing the role of Small & Medium Enterprises (SMEs)

3.7.1. Over the last five decades, the small scale segment has acquired a prominent place in the socio-economic development of the country. The segment plays a crucial role in spreading the benefits of economic growth among the masses by drawing surplus work force from the primary sector to productive non-farm employment, including

manufacturing and service/business activities. The definition of the segment has thus evolved in the recent past to include not only the traditional Small Scale Industry (SSI) units but also Small Scale Service and Business Entities (SSSBE). The segment is, therefore, appropriately termed as small enterprises.

3.7.2.

It is estimated that in 2003-04, small enterprises segment consisted of 113.95 lakh units, employed 271.36 lakh persons and contributed nearly 6.71 per cent of the countrys gross domestic product and 39.42 per cent of its total industrial production. Small Scale must be seen as breeding grounds for innovation and technology development where they become the technology sources for larger companies. It is necessary to incentivise technology

development in SMEs to enhance their competitiveness.

3.7.3.

Government has introduced the Small and Medium Enterprises Development Bill, 2005 in Parliament which seeks to facilitate the promotion and development small and medium enterprises and enhance their competitiveness. What is needed is focus on assisting the tiny component of the small enterprises because it constitutes over 98 per cent of the small enterprises engaged in manufacturing.

3.7.4.

Among the several impediments preventing the segment from achieving its full potential, the important ones are : access to timely and adequate credit (particularly, as a sequel to the general decline of the State financial corporations), technological obsolescence, infrastructural

bottlenecks, lack of R & D linkages, marketing constraints and disabling

30

rules and regulations. Because of the fact that small enterprises constitute the largest number of production units across practically all components of the manufacturing segment of the economy, they need special focus and support to enhance their competitiveness and that of manufacturing as a whole.

3.7.5.

The current approach does not address the general problems of taxation, interest rate or FDI policies, and experience shows that the cluster methodology can help introduce harmonised and simpler procedures, including those relating to labour laws. Similarly, flow of credit to small enterprises in clusters can be considerably smoothened and enhanced if steps are taken to encourage credit rating of these enterprises in conjunction with cluster-wide measures to minimize credit risks through capacity building of associations/self-help groups of small enterprises. This approach can also facilitate cost effective investment for improvements in common physical infrastructure, enhancement of skills, upgradation of technology and addressing the disadvantages of fragmented markets that small enterprises face individually. One of the effective measures for accelerating manufacturing growth in this segment lies in promoting growth poles or industrial clusters, referred to in the PURA (Provision of Urban Amenities in Rural Areas) context, in the 2005-06 Union Budget speech. The growth poles can cover all three (albeit somewhat overlapping) elements of the cluster approach industrial clusters, artisan clusters and agro-based clusters.

3.7.6.

Government has also set up a National Commission on Enterprises in the Unorganized Sector to review, inter alia, the status of the unorganized sector in terms of its nature, size/spread, employment, etc., identify constraints with reference to the sectors freedom of business and access to raw material, finance, infrastructure, technology, skills, markets, etc., and examine the existing programmes relating to employment generation, arrangements for estimating

employment/unemployment and social security system for labour in the sector.

31

3.7.7.

An issue which is often cited as an impediment to the growth of the segment is that of reservation of certain products for exclusive manufacture by the SSI units. To address this, the government has commissioned an independent empirical study to assess the impact of de-reservation on SSI productivity and employment.

3.7.8.

Another strategic issue that would need to be addressed flows from the fact that unregistered firms constitute a very large proportion of small enterprises. Delivery of the benefits of support measures to enhance the competitiveness of such enterprises, without making it mandatory for them to register themselves with the state agencies at the district level, would call for a study of the global best practices in this regard and their adaptation to suit the local conditions.

3.7.9.

Another aim would be to examine how more effective mechanisms can be established for SME collaboration with selected countries in the developed and developing world with a view to promoting closer business ties, enhancing competitiveness and increasing the share of Indian SMEs in global trade. Towards achieving these objectives,

consultation is underway to formulate the National Competitiveness Programme with special emphasis on making the SMEs competitive.

3.7.10. It is recommended that further work should be done on:

3.7.10.1. Examination of the methodology for enabling better credit delivery to the SSI sector by RBI 3.7.10.2. Designing a scheme to enable SSI units revitalize themselves to face import competition 3.7.10.3. Restructure/ Revitalization of State Finance Corporations (SFCs) 3.7.10.4. Giving a larger role to SIDBI in direct lending to SSI sector 3.7.10.5. Mandatory registration of SSI units in which Industry Associations could be empowered for facilitating the process of self registration.

32

3.7.10.6. A separate law for small enterprises including chapter on provisions of credit to the SSIs, be framed as prevalent in several other countries 3.7.10.7. One of the solutions for pushing manufacturing growth is through growth poles or industrial clusters, mentioned in the PURA (Provision of Urban Amenities in Rural Areas) context, in the 2005 -06 in the Union Budget speech. 3.7.10.8. Examination of the policy of reservation of certain products for exclusive manufacture by the SSI units and decide on the pace and sequencing of future de-reservation also taking into account the findings of the empirical study currently under way to assess de-reservation. 3.7.10.9. Delivery of the benefits of support measures to enhance the competitiveness to unregistered firms, without making it mandatory for them to register themselves with the state agencies at the district level, keeping in mind global best practices in this regard and their adaptation to suit the local conditions.

3.8. Enabling Public Sector Enterprises to meet competitive market conditions

3.8.1. Given the type and range of problems faced by the country at the time of independence on the economic, social and strategic fronts, it became a pragmatic compulsion to use the public sector as an instrument for self-reliant and accelerated growth of Indian Economy, Public Sector Enterprises (PSEs) were central to Indias philosophy of development. The dominant consideration for the continued large investments in PSEs was develop the core sectors of economy and to serve the equipment needs of strategically important sectors like Railways,

Telecommunications, Power, Steel, Coal, Defence, etc., and to provide a spring board for the economy to achieve a significant degree of selfsufficiency in the critical areas. In line with the mandate given to PSEs, they have managed to meet to a large extent the objective for which they were set up in the first place. However, over the years,

33

performance suffered due to a variety of reasons. The PSEs as a whole comprised of an admixture of better performing enterprises as well as loss making enterprises, the proportion of the latter in terms of numbers being larger. In spite of several initiatives taken over the years, the operational efficiency of some of the PSEs has not shown improvement. Further, PSEs continue to suffer from several disadvantages in terms of over manning, empowerment and multiplicity of overseeing agencies.

3.8.2.

Economic reforms being implemented by Government since 1991 across sectors have dramatically changed the conditions under which the PSEs had to function. The amendments to the Industrial Policy in 1992 removed licensing requirement in respect of almost all sectors for the domestic Private sector and unleashed a wave of fresh investment and growth in manufacturing. Most sectors which were earlier reserved for development only in the Public Sector were also opened to the private sector. The manufacturing sectors have also been opened up Parallelly, tariffs,

for Foreign Investment without any sectoral caps.

which provided high level of protection from imports to the Indian Industry including the PSEs, have been reduced very substantially since 1991 onwards. The average tariffs have been brought down to a level 15% in the Union Budget of 2005-06. All these factors accentuated the competition that the PSEs had to face. The PSEs have been working towards meeting these challenges by reorienting their functioning. Government as the owner of the PSEs also realized the need for reform and restructuring of the PSEs. In order to make them more efficient in terms of decision-making, powers have been delegated to the Boards of these Enterprises; the concept of Navaratnas and Miniratnas, etc. was introduced in order to give these PSEs the much needed autonomy for more efficient functioning. In order to address the issue of high staff costs, VRS was successfully implemented in many PSEs.

3.8.3.

In the context of increasing economic integration of India with the rest of the world, Indian Industry including the PSEs will have to continue the adjustment process and improve its competitive edge to survive. However, there are some basic disabilities under which the PSEs in India continue to function and these would come in the way of orderly

34

adjustment.

Some of the important ones in which further reform of the

PSEs is needed to remove these disabilities are identified below:-

3.8.3.1.

Autonomy:

For a strong and effective public sector,

devolution of full managerial and commercial autonomy is essential. This, however, needs to be closely integrated with

proper governance measures and accountability. 3.8.3.2. Review Mechanisms: There is a need for rationalization and optimization of multiple review mechanisms. 3.8.3.3. Delegation of powers: PSE Boards must be delegated with appropriate powers to pursue JVs, M&A, Technology Acquisition, etc. 3.8.3.4. Cost and Productivity: The total cost of labour compounded with low productivity of labour in PSEs needs corrective action. 3.8.3.5. Sourcing decisions: The decision making process regarding purchase of raw material and sale of goods depending upon the market conditions should be streamlined. Most of the

Government guidelines and procedures have been evolved over the years for PSEs carrying out production and sales in a protected domestic environment. These guidelines and

procedures tend to make these PSEs globally uncompetitive when applied to export/import. Hence, there is a need for

reexamination of extant procedures laid down by CVC. 3.8.3.6. Technology: Enabling policies that make technology transfer

mandatory to domestic enterprises in certain areas. 3.8.3.7. Ancillaries and supporting industry: For a PSE to be competitive the ancillary units and all the supporting units also need to be competitive. The location of these units could be in

India or in any part of the word and need to be competitive in terms of price and quality. The PSEs have to work towards this goal of procuring the best quality goods at the most competitive prices to retain their own competitiveness. Many of the

operations of a company would need to be outsourced to places where the cheapest and the best option is available in order to be

35

globally competitive. This may require a change in manner in which PSEs operate their obligations towards development of ancillaries. 3.8.3.8. Preference: Parallelly, some issues that have been questioned by some on economic grounds such as the purchase/price preference for the PSEs would also need to be reviewed in the overall context. 3.8.4. Towards achieving some of these objectives the Government has appointed two Expert bodies, the first one being the Ad hoc Group of Experts for making recommendations on some specific issues such as the ownership, the autonomy issue and the delegation of powers. The Ad Hoc Group of Experts has submitted its report 20 to the Government on Empowerment of CPSEs.

3.8.5.

The second Expert body is the Board of Reconstruction of Public Sector Enterprises. The Board is expected to advise Government on

strengthening the PSEs, suggest measures to make them autonomous and professional, including delegation of powers, etc. The Board has so far been making its recommendations on restructuring of specific CPSEs for consideration of Government.

3.8.6.

The National Manufacturing Competitiveness Council will take into account all the work done so far in respect of reform of the PSEs, study the remaining aspects, and make suitable recommendations for improving the competitiveness of the PSEs. Towards this end, various guidelines and procedures with respect to procurement, sales and marketing, pricing, recruitments, manpower planning, salary structures, technology transfer, outsourcing of production and production facilities, outsourcing of sales and marketing and labour laws for PSEs which make them uncompetitive would also be studied and necessary changes would be suggested to make the PSEs globally competitive.

Report of Ad-hoc group of experts on empowerment of CPSEs, Department of Public Enterprises, April 2005

20

36

3.8.7.

Hence,

it

is

recommended

that

in

order

to

make

PSEs

internationally competitive, following areas need to be addressed: Autonomy, review mechanism, delegation of powers, cost and productivity, sourcing decisions, technology, ancillaries and supporting industries.

3.9. Infrastructure Development

3.9.1. There can be no issue with the proposition that inadequate infrastructure renders Indian manufacturing uncompetitive. Economic Survey 2004-05 lists power, telecom, posts, roads, ports (airports and seaports), civil aviation, railways, urban infrastructure and legal infrastructure as infrastructure. As per the survey published in Global Competitiveness Report 21 2003-04, the top five problematic factors for doing business in India have been identified as inadequate

infrastructure, inefficient bureaucracy, corruption, restrictive labour regulations and tax rates.

3.9.2.

As a generalization, the infrastructure area where there have been visible improvements is telecom, with roads perhaps following as a somewhat distant second. The contours of unbundling, user charges and regulatory agencies are known. The issue is simply one of getting infrastructure reforms implemented and some areas of physical infrastructure are State subjects. From the manufacturing perspective, perhaps the most important infrastructure areas where reforms are to be speeded up are power, ports and railways, followed by roads. Among these, power supply remains the main physical infrastructure bottleneck to industrial growth on account of chronic shortages, high cost and unreliability. The average manufacturer in India loses 8.4 per cent a year in sales on account of power outages as opposed to less than 2 per cent in China and Brazil.

3.9.3.

Energy availability is critical to sustain industrial growth and competitiveness. Current energy shortages are seriously jeopardising the industrial resurgence and need to be seriously tackled. The holistic

21

World Economic Forum, Executive Opinion Survey (2003)

37

perspective on the issue of energy needs to be developed through a comprehensive national energy policy to encourage investments in the area. In addition to the electricity sector there should be added focus

on harnessing coal mining potential, developing pipeline infrastructure for transportation of gas, encouraging renewable energy resources including bio fuels etc. The survey based approach 22 comparing the investment climate across Indias states ranks them from the top as Delhi, Punjab, Andhra Pradesh, Maharashtra, Karnataka, Tamil Nadu, Gujarat, Haryana, Madhya Pradesh, West Bengal, Kerala and Uttar Pradesh based on per capita income distribution. The findings on states and cities further

3.9.4.

reveals that there are significant gaps in manufacturing labour productivity across states in India and there are larger labour productivity gaps between cities than there are between states.

3.9.5.

In this regard, it is recommend that:

3.9.5.1.

Additional investments need to be made by the government in increasing the port capacities (over and above the currently planned expansions).

3.9.5.2.

Further, port operations & procedures need streamlining by simplifying the number of procedures, automating the processes, etc. with a view to bring down customs clearance time.

3.9.5.3.

While the Golden Quadrilateral (GQ) and the east-west and north-south corridor projects launched by the National Highways Authority of India (NHAI) are steps in the right direction, port connectivity to manufacturing clusters and the GQ through targeted road development projects is essential.

3.9.5.4.

While the Electricity Act 2003 is a step in the right direction, state level power reform supported by rationalized

INDIA : Investment Climate Assessment 2004 : Improving Manufacturing Competitiveness, November 2004, World Bank

22

38

regulatory framework needs to be put in place for enabling better access to quality power. 3.9.5.5. The Energy sector should be looked at from a holistic perspective in view of the fact that energy shortages are seriously threatening the sustainability of industrial growth resurgence and the competitiveness of the manufacturing sector. The critical impotence of the reliable reasonable

cost power supply for healthy manufacturing sector growth needs to be recognised strongly.

3.10. Importance of Intellectual Property Rights (IPRs) in the manufacturing sector

3.10.1. In today's knowledge-based economy, the ability of policy makers to recalibrate policies to support technological innovation within enterprises and to reconfigure existing competencies to create new knowledge for (and from) innovation has become a strategically important capability. In developing countries like India, this

recalibration and reconfiguration process is difficult because of capacity constraints and economic, political and social complexities. Enterprises must be able to acquire new knowledge not only to combine it with existing accumulated knowledge to create the knowledge required for innovation but also in order to respond competitively in a TRIPS-compliant IPR environment. Hence,

effective utilisation of intellectual property rights particularly patents, has acquired great importance for technology upgradation and growth in the industry as well as wealth creation and gaining international competitiveness.

3.10.2. The Government has taken several initiatives in the IPR area including revamping of all the laws and modernisation of the IPR/Patent Offices as a strategic response to the globalisation and liberalization of the Indian economy and given the increasing importance of IPRs. Some of the key issues for the manufacturing sector to take advantage of the Intellectual Property regime that require support through capacity building are:

39

3.10.2.1. In a product patent regime, Indian firms will have to look for new sources of growth in the future and the biggest source will be productive R&D, which can deliver patentable innovations.

3.10.2.2. Similar to other industrializing economies, India will have to shift the focus of industrial research towards the acquisition of a more complex knowledge base for innovation.

3.10.2.3. At the macro economic level, the absorption, or assimilation, of increasingly modern technologies, and adaptation to change in industrial structure, are increasingly becoming the critical components of competitive transformation. The

transition from the early stages of accumulation of minimum knowledge levels of innovative capability and adaptation; to the creation and management of

knowledge as a strategic asset must be accelerated if India is to maintain and improve its growing competitive position.

3.10.2.4. It is a positive sign that many Indian enterprises, particularly in the knowledge intensive sector (pharmaceutical, biotechnology, IT, automobiles, etc.) are developing competitive capability in innovative R&D by acquiring new components of knowledge and reconfiguring architectural linkages between these

components in new ways. The new components of knowledge are acquired by increasing investment, by hiring new scientists with knowledge about innovative R & D and crucial tacit knowledge particularly for the manufacturing sector.

3.10.2.5. The reconfiguration of the architectural linkages is being accompanied by changing management and organizational structures along with new mechanisms of knowledge transfer and integration, as well as a policy environment more conducive to innovation and IPRs.

40

3.10.2.6. It necessary that knowledge-driven industries in India should increasingly attempt to embrace the network model of innovation and R&D by intensifying their collaboration with research institutes, efforts universities need to be and other

counterparts.

Such

particularly

supported and encouraged for the manufacturing sector.

3.10.2.7. It is necessary for the Government of India and its concerned Ministries jointly with relevant stakeholders/Industry

Organisations like CII, FICCI and ASSOCHAM to launch a national campaign for Indian firms to invest in next generation intellectual property in the product, process and practice domain.

3.11. Importance of Information Technology (IT) in manufacturing sector

3.11.1. Current Stage of IT adoption in Indian manufacturing sector is not encouraging. Indian manufacturing industries are facing various challenges in terms of global competitiveness partly due to lack of IT enablement of their business processes and management practices.

3.11.2. In India, over 90% of the manufacturing enterprises fall under Small and Medium scale categories and the majority of them are still undergoing nascent stages of the IT adoption. They lack the knowledge of business performance improvement potential of IT and it is still used as office administration and accounting automation tools. However, the

manufacturing enterprises in developed economies are at stages covering functional automation and cross functional process integration. Hence, there is increasing need to create awareness about IT application among Indian manufacturing firms. There is ample consensus that proper adoption of IT requires knowledge transfer efforts along with implementing common IT infrastructure in aligning with industry clusters development program. Furthermore, it also requires the involvement of top management, industry associations, business partners etc. In many countries government and industry associations

41

have played a vital role in IT adoption amongst the industries particularly in the SME sector.

3.11.3. Even though there is a clear business case in favor of increased adoption of integrated enterprise-wise IT application in the manufacturing sector, in most organizations use of IT is limited to automation of specific functions like inventory control, external communication, etc. Most of the enterprises have not been able to adopt the IT architecture due to lack of proper knowledge and unaffordability of the costs associated with it.

3.11.4. The development of the e-economy can be seen as being of major importance for the growth of Indian economy as a whole and would also integrate local manufacturing enterprises more to the regional and global markets. This will only be possible if investment and modernization of production and services takes place.

3.11.5. A planned model of IT adoption needs to be implemented in the current Indian manufacturing scenario. The relation between

quality and certification and the assessment process (auditing) is also an extremely important element in the manufacturing and movement of goods and in the whole supply chain. These concepts have to be adapted in the e-business context too and applied to the manufacturing sector in India in order to enable them to be competitive.

3.12. Firm level competitiveness

3.12.1. In order to be successful, Indian companies will need to adopt a global mind set to build scale and achieve cost excellence; acquire market access rapidly; strengthen design and innovation skills; build a global or regional operating foot print; and master the ability to manage a worldclass talent pool and organization. These actions will form the

42

foundations for ambitious growth and will need to be supported by a judicious choice of market segments and business models. Firms

normally have their own strategies for lowering cost, improving product quality and finding marketing networks.

3.12.2. Global Competitive Analysis of Indian Manufacturing Sector indicates that the Total Factor Productivity (TFP) in Indian manufacturing sector measured as the value of capital and labour deployed is one fifth of USA and one half of that in developing economies with negligible change in relative productivity during the last two decades. The technological

competitiveness is low with respect to both product and process technology because the human resources allocated to design and engineering activity is about 20-50% less compared to the industrialised countries.

3.12.3. While initiatives are taken at the country and sector levels to enhance competitiveness in the economy, maintaining firm level competitiveness is equally essential for individual firms if growth aspirations are to be realized. Individual firms can do this by way of building abilities to acquire, assimilate, develop new technologies; reduce production costs; cut down delivery time; practice Total Quality Management; enhance productivity and customer service. Use and development of technology is central to competitiveness. However, using technologies efficiently is not a passive, automatic process of simply importing a set of machines and instructions on how to use them. It involves building technical understanding and information skills, managerial practices and links with other firms and institutions which could be termed as 'capabilities' in a broad sense. Such capability development can be a slow, often costly and risky learning process. The secret of competitiveness lies in the effectiveness with which countries promote the development of technological and managerial capabilities. 3.12.4. While India's industrial policies since independence have lead to development of a diversified manufacturing sector, there has been a lack of technological capability and dynamism. It is evident at both, macro level (relatively low share of manufacturing in GDP, low impact

43

on employment growth and poverty reduction) as well as micro level (low productivity, lack of international competitiveness). Studies on global competitiveness for selected sector of the industry have shown that among others, the factors inhibiting growth are: inefficient use of resources resulting in poor product quality accompanied by hidden high cost due to rejection and re-work in the course of manufacturing, building up inventory at the various stages in the form of raw materials, work-in-process, finished components, finished product etc. This calls for increasing competitiveness by boosting firms performance by systematically identifying and eliminating waste throughout the entire business cycle by applying appropriate managerial and technological practices such as Lean Manufacturing Technologies, like 5S system (Sort, Set in order, Shine, Standardize & Sustain), Visual controls, standard operation procedures (SOPs), Just-in-Time (JIT), KANBAN, Cellular layout, Value stream mapping, Total Productive Maintenance (TPM) etc.

3.12.5. While some organisations in the country have initiated Lean manufacturing practices and have started to reap the benefits, these practices have not reached many industrial units in the country. A

National programme on application of Lean manufacturing is needed so that it would cover various important sectors of the industry.

3.12.6. It is necessary to pursue further in this regard through appropriate mechanisms.

3.13. Role of state governments

3.13.1. The State Government have a crucial role to play since the actual activity of manufacturing takes place in the States. It is, therefore, very important that issues falling under the domain of the State Governments need to be addressed adequately in order to achieve the objective of sustaining the growth of manufacturing industry. As there is

considerable variation between the competitiveness in different sectors

44

and in different States, the involvement of the State Governments in this exercise is very important. Unless the State Government policies are pro-active and necessary reforms are undertaken, it would be difficult for the manufacturing industry to improve either in qualitative or quantitative terms and secure a larger share of the global market.

3.13.2. It has long been felt that there are several problems being faced at the ground level leading to higher transaction costs which act as an impediment to the robust growth of the manufacturing sector and therefore, these need to be addressed on a priority basis. Vital areas like State Government taxation, availability of land and other infrastructure requirements like water, electricity, implementation of regulatory laws dealing with labour, environment, etc. need to be appropriately addressed.

3.13.3. The State Governments have a major role and stake in the successful implementation of relevant strategies to ensure growth of manufacturing sector for balanced economic growth and creation of additional jobs. Therefore, a continuous dialogue with the States and working together in the implementation of the reforms is essential. This needs to be done by regular interfacing with the State

Governments on the issues relating to manufacturing in the States.

3.14. Sub-sector engagement

3.14.1. As a part of the overall approach toward enhancing competitiveness in manufacturing sector, it becomes imperative to focus on sub-sector interventions because of their own characteristic requirements. It is

expected that even as the broad based strategy is being evolved cutting across various sectors, there would be certain sectors which could emerge in the forefront of growth and employment because of the unique opportunities they enjoy at the present time. Any exercise to prioritize among a large number of sub-sectors would require detailed analytical study of each regarding their relative potential in the Global context or and over a period of time. That exercise would need to be

45

undertaken quickly.

However, some of these sectors are ideal

candidates for attention by the Government as they have obvious competitive advantages in the world market and would, therefore, need to be given higher priority in the present economic context. Accordingly, it becomes necessary to encourage such sub-sectors and enable them move forward on the growth path quickly. Textiles and Garments, Leather and Leather Products, Auto Components and Drugs & Pharmaceuticals select themselves at this point in time.

3.14.2. Sub-sectorwise engagement to identify impediments for growth and suggest initiatives aimed at enabling growth and employment have been carried out through sub-group meetings in the following areas :

Leather & Leather Goods Food Processing Textiles & Garments Auto Components Capital Goods IT Hardware & Electronics Paper Chemicals & Petrochemicals Drugs & Pharmaceuticals

3.14.3. In addition to the above, more sub-group engagements covering others sub-sectors/generic issues is necessary. engagements are planned in the near future : Innovation Policy Steel Minerals/Metals Telecom Equipment/Electronics Bio-technology Fertilizers Cement Competitiveness of PSEs University/Industry Coordination / Collaboration Among them, following

46

Infrastructure Tax Issues Labour Issues Offset Policy & Technology Transfer Issues Gems & Jewellery Handicrafts

3.15 Creating a monitoring mechanism & measuring performance

3.15.1 One of the weaknesses in achieving the goals set in the past has been weak implementation of policies and programmes. It is

imperative that in order to achieve the high targets of growth and employment being aimed at, it is essential that the

implementation mechanisms as well as institutions are properly designed. Creation of such mechanisms and institutions is

therefore an immediate necessity.

3.15.2

The strategy will have to be implemented by synergistic action by all stakeholders from the Government, industry and others. The Mission mode of implementation or a similar Mechanism that will improve efficiency in implementation could be the

appropriate mode in respect of some sectors such as leather & leather goods, textiles & garments and food processing industries. This will help in providing a focal point for decision making in a time-bound manner and help in better monitoring of the growth objectives. As and when required the other sectors could adopt such mechanisms.

3.15.3

The key component of any strategy is a means of measuring progress towards a defined goal. A suitable format for monitoring should,

therefore, be put in place. For monitoring to be effective, a set of key performance indicators should be identified/developed, which would allow a quantitative and qualitative assessment of the progress of manufacturing sector. These indicators shall

47

allow periodic monitoring of performance and effectiveness of initiatives/ reforms/ actions by the government, industry and other stakeholders of manufacturing. The NMCC would review periodically the implementation of the various recommendations and the elaborations in the sub-sector engagements. The

measures to be reviewed would include action taken by the Centre and the State Governments in their respective domain. 3.15.4 The monitoring mechanism should also include surveys of business climate based on the opinion of the decision makers/leaders on various macro environmental factors of competitiveness. This would serve as an important feedback

mechanism in the implementation of manufacturing reforms.

48

4
4. Way Forward Conclusions and Key Recommendations
4.1. 4.1.1. Enhancement of Government focus on manufacturing imperative and competitiveness Competitiveness is central to robust growth of manufacturing sector. Manufacturing sector is crucial, directly or indirectly, for providing jobs for the large work force entering the job market every year, particularly from the rural areas. 4.1.2. The growth rate of manufacturing has to reach at least a level of 12 per cent as against the trend growth rate of 7 per cent achieved during 1995-2004. 4.1.3. (para 3.1.4)

There should be a well planned strategy to increase manufacturings share in GDP by matching or exceeding the growth rates of Services sector. Even with a growth rate of 12%, the share of manufacturing in GDP is expected to reach only 23% by 2015. (para 3.1.4)

4.1.4.

The aspirational growth target of 12% in manufacturing would create with the current employment elasticity, only about 1.60 million direct jobs annually. However, in case the employment elasticity is to increase to 0.59 obtaining in the 1980s, 2.9 million new direct jobs a year would get created directly in the manufacturing sector. In addition indirect jobs would also be created as a result of multiplier effects. (para 3.1.4)

49

4.1.5.

The policy framework should encourage building up scale of operations in the domestic market. Financial institutions should be geared to assist global level projects as well as address issues such as risk management and debt restructuring faced by companies. (para 3.1.5)

4.1.6.

The enormous opportunities for India leveraging the global dynamics of outsourcing needs to be taken advantage and accelerated through greater showcasing of Indias competitive advantage skill intensive industries and through wider participation of Indian firms including the SME sectors in the global value chains. (para 3.1.2)

4.2. 4.2.1.

Creating conditions for the growth of the manufacturing sector It is imperative that large scale investments, both domestic and foreign would have to be attracted into the manufacturing sector to enable highlevels of growth envisaged. (para 3.1.6)

4.2.2.

In order to be globally competitive, the manufacturing sector needs to be modernized through infusion of modern technologies. Innovative domestic development needs to be stepped up to market products specially designed to serve the large number of people at the bottom of the pyramid. (para 3.1.7)

4.2.3.

As many of the important issues such as Land, labour, water, electricity, environment are in the domain of the State Governments, appropriate reforms are also necessary in these areas, such as: (para 3.2.8.4) Providing the necessary climate for the growth of manufacturing in the states Providing infrastructure, particularly in respect of power, water, roads, etc.

50

Development of a common format for computerization of required records.

Doing away with multiplicity of inspections by large number of inspectors.

4.2.4.

Farming out to recognized private agencies, various inspections.

Retention of the Contract Labour (Regulation and Abolition) Act, 1970 but tightening up Section 10 so that ambiguity about continuance of contract labour and absorption following abolition is removed.

(para 3.2.10.5) 4.2.5. Dispensing the requirement of State Government permission under the Industrial Disputes Act (IDA), 1947, without adversely affecting the interests of labour given the other provisions of labour legislation. (para 3.2.10.7) 4.2.6. Implementation of the recommendations of The Second National Commission on Labour submitted in 2002 to harmonize labour laws under five heads of industrial relations, wages, social security, safety & welfare and working conditions. With this flexibility will improve in the organized labour market and there will simultaneously be better social security provisions in the unorganized one. (para 3.2.10.8) 4.2.7. Labour productivity which is normally sector specific needs to be constantly improved in order to sustain competitiveness. (para 3.2.10.9) 4.3. 4.3.1. Lowering cost of manufacture Lowering cost of manufacture in India should be one of the prime focus areas to concentrate upon. 4.3.2. (para 3.2.3)

The peak import duty shall be no more than 10% and be fixed dependent upon the levels of indirect taxation in India. In the interest of a stable policy regime, the stage wise downward duty reductions should be pre-announced. (para 3.2.5.1)

51

4.3.3.

While the basic customs duty may be zero, imported products should face duties equivalent to domestic indirect taxes paid by domestic manufacturers. (para 3.2.5.3)

4.3.4.

There should be an all India combined goods and service tax (GST), with service sector taxation integrated into the VAT framework instead of being a tax on turnover. This should be accompanied by a withdrawal of all other taxes like central excise, central sales tax, octroi, State-level sales tax, entry tax, stamp duties, transportation taxes and so on. (para 3.2.6.3)

4.3.5.

With import duties declining, restrictions on DTA sales need to be reexamined. Also, the concept of economic regions with world class infrastructure but with no fiscal concessions could be considered. (para 3.2.7.2)

4.4. 4.4.1.

Investing in innovations The transition from the early stages of accumulation of minimum knowledge levels of innovative capability and adaptation, to the creation and management of knowledge as a strategic asset must be accelerated to maintain and improve Indias competitive position. (para 3.10.2.3) in India should

4.4.2.

It

necessary

that

knowledge-driven

industries

increasingly attempt to embrace the network model of innovation and R&D by intensifying their collaboration with research institutes, universities and other counterparts. Such efforts need to be particularly supported and encouraged for the manufacturing sector. (para 3.10.2.6) 4.4.3. Existing policies relating to R&D funding, incentives for supporting generic technologies, engineering and physical sciences should be reviewed and steps taken to encourage better coordination of efforts and greater focus on innovation and productivity enhancing technologies. (para 3.3.2.1)

52

4.4.4.

A planned model of IT adoption needs to be implemented in the current Indian manufacturing scenario. The relation between quality and

certification and the assessment process (auditing) is also an extremely important element in the manufacturing and movement of goods and in the whole supply chain. These concepts have to be adapted in the ebusiness context too and applied to the manufacturing sector in India in order to enable it to be competitive. (para 3.11.5)

4.4.5.

Priorities should be established for support of advanced manufacturing technologies. (para 3.3.2.2)

4.4.6.

The need for creating a coordination mechanism on Manufacturing Research and Development should be pursued. (para 3.3.2.3)

4.4.7.

Support Prototype development and design innovations through fund sharing/ enabling establishment of references, etc. (para 3.3.2.4)

4.4.8.

Create common testing facilities and centres of manufacturing technology excellence. Management of these by the beneficiaries themselves would encourage the Indian manufacturing industry to invest in innovations. (para 3.3.2.5)

4.4.9.

Strengthen the Intellectual Property Rights framework by provision of necessary infrastructure and human resources particularly in the case of the Patent and Trade Mark systems to encourage more Patenting and Trade Mark registrations. (para 3.3.2.6)

4.4.10. It is necessary that the Government of India and its concerned Ministries jointly with relevant stakeholders/Industry Organisations like CII, FICCI and ASSOCHAM launch a national campaign for Indian firms to invest in next generation intellectual property in the product, process and practice domain. (para 3.10.2.7)

4.4.11. Promotion of establishment of Technology Parks.

(para 3.3.2.7)

4.4.12. In the present era of knowledge based industrial development and globalization, effective utilisation of Intellectual Property Rights

53

particularly, patents, has acquired great importance for technology upgradation and growth in the industry as well for wealth creation and gaining international competitiveness. Through suitable interventions, enhance awareness about creating wealth from IPRs among many sectors of the industry especially in manufacturing sector. (para 3.10.1)

4.4.13. Preparation of a sector wise study of technology status and building a future model for R&D support by the Government, especially in the areas of emerging technologies which have the potential to transform products, processes and services. (para 3.3.3)

4.4.14. A Global Technology Acquisition Fund to be set up, which would enable Indian industry to acquire very high technology intensive companies abroad, when ever such opportunities arise. Framework for

administering such a fund to be separately worked out.

(para 3.3.4)

4.4.15. Small Business innovation Research and Small Business technology transfer focused on manufacturing need to be addressed. The unique capabilities of the National Laboratories and the IITs and other Technical Institutions need to be leveraged to benefit the Small and Medium Manufacturing Industries. (para 3.3.5)

4.5. 4.5.1.

Strengthening education and training A close interaction should be initiated between academia-industrygovernment for creating Centres of Excellence in manufacturing technologies. The quality of Technical education at the vocational level as well as the University level needs to be addressed. Special focus needs to be given to issues relating to the emerging requirements of Industry while designing the syllabus by these institutions, such as: (para 3.4.2)

4.5.2.

Rationalize the complex procedures for changing curricula and course syllabi to enable institutes keep pace with developments in technologies. A concerted national initiative is required to be taken to revise the curriculum at degree and diploma levels for all technical courses. (para 3.4.4.1)

54

4.5.2.1.

Encourage the private sector to establish and operate demand driven technical training centres through financial and other incentives, under a carefully designed industry-managed, and government supported, quality control and accreditation system. (para 3.4.4.2)

4.5.2.2.

Develop

comprehensive

National

Vocational

Education

Qualification System and set up Vocational Education & Training Institutes in each State. In addition, large private sector manufacturing/ engineering organizations must be encouraged to adopt Vocational Education Institutes through appropriate

schemes. 4.6. 4.6.1. Adoption of global best practices in manufacturing

(para 3.4.4.3)

Develop relevant sub-sector wise benchmark data bases as well as global best practices that could help the industry measure itself against the best in class performances. A Manufacturing Advisory Service would be established to deliver practical help to manufacturing SMEs. (para 3.5.1)

4.6.2.

Setting up of a group to study the concepts & applicability of manufacturing architecture (integral vs. modular) as relevant to the Indian conditions. (para 3.5.2)

4.7. 4.7.1.

Right market framework, competition and regulations Government to work towards providing the right market framework and regulatory environment that provides impetus to the manufacturing sector for which the NMCC will provide appropriate actionable policy recommendations. (para 3.6.1)

4.7.2.

In the area of compliance with environment & safety regulations, certain special institutions or firms of reputation could be identified to carry out necessary certifications on the lines of financial audit firms. (para 3.6.3)

55

4.7.3.

Improvement in the extant procedures for investment approvals and implementation of projects and for simplification of the process for both public and private investments need to be implemented as per the recommendations made earlier by a high power committee 23 . (para 3.6.4)

4.7.4.

Enable Consolidation of regulatory frame work by weeding out legislations that have outlived their utility, bringing others in line with the present day technological, environmental, competitive and social requirements to make the administration as well as compliance effective. (para 3.6.5)

4.7.5.

Re-engineering of procedures to reduce discretion through clear cut rules, rationalising approval/permission requirements of manufacturing industries. Such changes should help in optimizing inspections by

Regulatory Authorities etc. and minimize the transaction costs to the manufacturing sector. 4.8. 4.8.1. Promotion of small and medium industries Small Scale must be seen as breeding grounds for innovation and technology development where they become the technology sources for larger companies. 4.8.2. (para 3.7.2) (para 3.6.6)

Since small enterprises constitute the largest number of production units across practically all components of the manufacturing segment of the economy, they need special focus and support to enhance their competitiveness. (para 3.7.4)

4.8.3.

Provision of adequate and timely financing to the SMEs is crucial and, therefore, steps need to be taken to remove the bottlenecks and enable easier flow of funds. (para 3.7.4)

4.8.3.1.

RBI should examine the methodology for enabling better credit delivery to the SSI sector. (para 3.7.10.1)

Report on Reforming investment approvals and implementation procedures, Dept. of IPP, November 2002.

23

56

4.8.3.2.

Restructure/ Revitalize State Finance Corporations (SFCs) (para 3.7.10.3)

4.8.3.3.

SIDBI be given a larger role in direct lending to SSI sector (para 3.7.10.4)

4.8.4.

Mandatory registration of SSI units in which Industry Associations could be empowered for facilitating the process of self registration. (para 3.7.10.5)

4.8.5.

A separate law for small enterprises including chapter on provisions of credit to the SSIs, be framed as prevalent in several other countries. (para 3.7.10.6)

4.8.6.

One of the solutions for pushing manufacturing growth is through growth poles or industrial clusters, mentioned in the PURA (Provision of Urban Amenities in Rural Areas) context, in the 2005-06 budget speech. (para 3.7.10.7)

4.8.7.

A scheme to be evolved to enable SSI units revitalizes them to face import competition. (para 3.7.10.2)

4.8.8.

Technology Upgradation is crucial for SMEs to survive in an increasingly competitive world and urgent actions including provision of suitable incentives are needed to improve their access to new technologies. (para 3.7.4)

4.8.9.

Examine the policy of reservation of certain products for exclusive manufacture by the SSI units and decide on the pace and sequencing of future de-reservation also taking into account the findings of the empirical study currently under way to assess de-reservation. (para 3.7.10.8)

4.8.10. Delivery of the benefits of support measures to enhance the competitiveness to unregistered firms, without making it mandatory for them to register themselves with the state agencies at the district level,

57

keeping in mind global best practices in this regard and their adaptation to suit the local conditions. (para 3.7.10.9)

4.8.11. Create effective mechanism for establishing SMEs collaboration with selected industries in India and abroad with a view to promote closer business ties, enhance competitiveness and increase the share of Indian SMEs in global trade. (para 3.7.9)

4.8.12. Formulate National Competitiveness Programme with special emphasis on making the SMEs competitive. (para 3.7.9)

4.9. 4.9.1.

Enabling public sector manufacturing industries In order to make PSEs internationally competitive, following areas need to be addressed: Autonomy: (para 3.8.3) For a strong and effective public sector, devolution of

full managerial and commercial autonomy is essential. This, however, needs to be closely integrated with proper governance measures and accountability. Review Mechanisms: There is a need for rationalization and

optimization of multiple review mechanisms. Delegation of powers: PSE Boards must be delegated with

appropriate powers to pursue JVs, M&A, Technology Acquisition, etc. Cost and Productivity: The total cost of labour compounded

with low productivity of labour in PSEs needs corrective action. Sourcing decisions: The decision making process regarding purchase of raw material and sale of goods depending upon the market conditions should be streamlined as the present guidelines and procedures tend to make these PSEs globally uncompetitive when applied to export/import. Technology: Enabling policies that make technology transfer mandatory to domestic enterprises in certain areas.

58

Ancillaries and supporting industry: For a PSE to be competitive the ancillary units and all the supporting units also need to be competitive. The PSEs have to work towards this goal of procuring

the best quality goods at the most competitive prices to retain their own competitiveness. This may require a change in manner in which PSEs operate their obligations towards development of ancillaries. Preference: Parallelly, some issues that have been questioned by some on economic grounds such as the purchase/price preference for the PSEs would also need to be reviewed in the overall context.

4.10.

Infrastructure development

4.10.1. Infrastructure development, particularly removing of bottlenecks in physical infrastructure is very important. In particular: 4.10.1.1. Additional investments need to be made by the government for increasing the port capacities (over and above the currently planned expansions). (para 3.9.4.1)

4.10.1.2. Further, port operations & procedures need streamlining by simplifying the number of procedures, automating the processes, etc. with a view to bring down customs clearance time. (para 3.9.4.2) 4.10.1.3. While the Golden Quadrilateral (GQ) and the east-west and northsouth corridor projects launched by the National Highways Authority of India (NHAI) are steps in the right direction, port connectivity to manufacturing clusters and the GQ through targeted road development projects is essential. (para 3.9.4.3)

4.10.1.4. While the Electricity Act 2003 is a step in the right direction, state level power reform supported by rationalized regulatory framework needs to be put in place for enabling better access to quality power. (para 3.9.4.4) 4.10.1.5. The Energy sector should be looked at from a holistic perspective in view of the fact that energy shortages are

59

seriously threatening the sustainability of industrial growth resurgence and the competitiveness of the manufacturing sector. The critical impotence of the reliable reasonable cost power supply for healthy manufacturing sector growth needs to be recognised strongly. (para 3.9.3 ) and (para 3.9.5.5)

4.11.

Firm level competitiveness

4.11.1. Encourage firms to build abilities to acquire, assimilate, develop new technologies; reduce production costs; cut down delivery time; practice Total Quality Management; enhance productivity and customer service recognizing the fact that it is the firms that compete in the market. (para 3.12) 4.11.2. While some organisations in the country have initiated Lean

manufacturing practices and have started to reap the benefits, these practices have not reached many industrial units in the country. A

National programme on application of Lean manufacturing is needed so that it would cover various important sectors of the industry. (para 3.12.5) 4.12. Role of State Governments

4.12.1. Ensure continuous dialogue with the States for working together in the implementation of the reforms in the manufacturing sector. This will

have to be done by proper interfacing with the State Governments on the issues relating to manufacturing in the States. (para 3.13.3)

4.12.2. With a view to bring down transaction costs examine areas like: (para 3.13.2) State Government taxation, availability of land infrastructure requirements like water, electricity, etc. implementation environment, etc. of regulatory laws dealing with labour,

60

4.13.

Creating a monitoring mechanism & measuring performance

4.13.1. It is imperative that in order to achieve the high targets of growth and employment being aimed at, it is essential that the implementation mechanisms as well as institutions are properly designed. Creation of such mechanisms and institutions is therefore an immediate necessity. (para 3.15.1) 4.13.2. The Mission mode of implementation or a similar mechanism that will improve efficiency in implementation could be the appropriate mode in respect of some sectors such as leather & leather goods, textiles & garments and food processing industries. This will help in providing a focal point for decision making in a time-bound manner and help in better monitoring of the growth objectives. As and when required, other sectors could adopt such mechanisms. (para 3.15.2)

4.13.3. In order to attain competitive edge in manufacturing the constraints being faced have to be mitigated. The generic issues such as lack of proper infrastructure, higher transaction costs, higher interest rates, inadequate power availability and other regulatory issues are being addressed by NMCC in detail for which further studies if required and elaboration needs to be done. Simultaneously, sub-sectors of

manufacturing are being addressed in sub-group meetings of NMCC and separate action plans are being prepared and monitored. A

strategy for phasing of the implementation plans and deliverables comprising of both generic issues and sub-sector engagements into long term, medium term and short term needs to be done based on their potential to yield results and an assessment of their feasibility. 4.13.4. The NMCC would review periodically the implementation of the various recommendations and the elaborations in the sub-sector engagements. The measures to be reviewed would include action taken by the Centre and the State Governments in their respective domain. (Para 3.15.3)

4.13.5. For monitoring to be effective, a set of key performance indicators should be identified/developed, which would allow a quantitative and

61

qualitative assessment of the progress of manufacturing sector. These indicators shall allow monitoring of performance and effectiveness of initiatives/ actions by the government, industry and other stakeholders of manufacturing. A body like the NMCC has the role to monitor the

delivery by various stakeholders on the recommendations/action programme evolved for the manufacturing sector. (Para 3.15.3)

4.13.6. The monitoring mechanism could also include surveys of business climate based on the opinion of the decision makers/leaders on various macro environmental factors of competitiveness. This

would serve as an important feedback mechanism in the implementation of manufacturing reforms. (Para 3.15.4)

62

ANNEX - 1

Classification of Manufacturing
The basic classification of all economic activities is the UN systems International Standard Industrial Classification (ISIC). 24 At the 2-digit level, these are also the classifications followed by the CSO (Central Statistical Organization). Manufacturing in the industrial classification and the 2-digit codes and descriptions (common to both ISIC and CSO) are given in the table below. This then constitutes the definition of manufacturing, both for cross-country comparisons and for Indian data. What should be noted is that some of these categories are sometimes not included in data on manufacturing. Examples are codes 22, 36 and 37.

ISIC 2-digit code 15 16 17 18 19

ISIC description Manufacture of food products and beverages Manufacture of tobacco products Manufacture of textiles Manufacture of wearing apparel; dressing and dyeing of fur Tanning and dressing of leather; manufacture of luggage, handbags, saddlery, harness and footwear

20

Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials

21 22 23

Manufacture of paper and paper products Publishing, printing and reproduction of recorded media Manufacture of coke, refined petroleum products and nuclear fuel

24 25 26 27 28

Manufacture of chemicals and chemical products Manufacture of rubber and plastics products Manufacture of other non-metallic mineral products Manufacture of basic metals Manufacture of fabricated metal products, except machinery and equipment

Revision 3.1. This is not identical with the North American Industrial Classification System (NAICS) used in the CII-McKinsey study, although difference surface at levels of disaggregation far beyond the 2-digit level.

24

63

29 30 31 32

Manufacture of machinery and equipment n.e.c. Manufacture of office, accounting and computing machinery Manufacture of electrical machinery and apparatus n.e.c. Manufacture of radio, television and communication equipment and apparatus

33

Manufacture of medical, precision and optical instruments, watches and clocks

34 35 36 37

Manufacture of motor vehicles, trailers and semi-trailers Manufacture of other transport equipment Manufacture of furniture; manufacturing n.e.c. Recycling

In CSOs data collection exercises, the entire manufacturing activities are classified into two broad sectors, viz., manufacturing - 'registered' and 'unregistered'. For registered manufacturing, data are collected annually through the Annual Survey of Industries (ASI). This is part survey (sample) and part census. Unregistered

manufacturing, which also includes own account enterprises, is covered much less frequently, typically, once every five years.

64

Annex-2

Growth targets for 17 industry groups under Manufacturing (IIP)

NIC 2 digit code

Description

Weight in IIP (%)

5 yr. Avg. growth (19992003) 8.7

Possible target growth (average) 20%

Contribution to manufacturing growth (%) (Weight x Growth rate) .0192

35-36

30

26

38 33 37 28

22 23 29 20-21 31 32 34

24 27 25

Machinery & equipment, other than transport equipment Basic chemicals & chemical products (except petroleum & coal) Textile products (including wearing apparel) Other manufacturing industries Basic metal & alloy industries Transport equipment & parts Paper & paper products & printing, publishing & allied industries Beverages, tobacco & related products Cotton textiles Leather & leather & fur products Food products Rubber, plastic, petroleum & coal Non-metallic mineral products Metal products & parts, except machinery & equipment Wool, silk & man-made fibre textiles Wood & wood products, furniture & fixtures Jute & other vegetable fibre textiles (except cotton) Total:

9.6

14.0

6.9

18%

.0252

2.5

3.9

17%

.00425

2.6 7.5 4.0 2.7

2.5 5.9 8.4 4.5

15% 12% 10% 10%

.0039 .009 .004 .0027

2.4 5.5 1.1 9.1 5.7 4.4 2.8

12.1 0.3 4.5 4.6 6.4 6.6 2.8

10% 8% 8% 7% 7% 7% 7%

.0024 .0044 .00088 .00637 .00399 .00308 .00196

2.3 2.7 0.6 80.0 25

6.4 -7 -0.4

4% 1% 1%

.00092 .00027 .00006

.09258

25

There are rounding approximations.

65