Manufacturing Revolution: Need of the Hour

The root of wealth is economic activity

and lack of it brings material distress. In
the absence of fruitful activity, both
current prosperity and future growth are
in danger of destruction.
-The Arthashastra

Let us juxtapose the following two aspects:

Agriculture accounts for a disproportionately
large share in employment
Agriculture
accounts for
14.1%* of
GDP

The manufacturing sector is crucial for

employment generation and development of
an economy. Historically, the development
processes have witnessed a trend of people
shifting from agriculture to non-farm
activities such as manufacturing and
services. This renders manufacturing crucial
for Indias development and employment
objectives. However, the current share of
manufacturing in GDP has halted at 15%,
much below its potential, thwarting India
from fully leveraging the opportunities of
globalisation. Recognising this, Government
of India (GoI) has announced the National
Manufacturing Policy, 2011 which inter alia
envisages the rise of manufacturings share
in Indias GDP to 25% by 2022 and creation
of an additional 100 million jobs in this
sector by the same time.

Need to Boost Manufacturing

Known economist A.G.B. Fisher has
remarked, In every progressive economy,
there has been a steady shift of
employment and investment from the
essential primary activities to
secondary activities of all kinds and to a
still
greater
extent
into
tertiary
production.

But employs
53.2%* of
workforce

Input (workforce) - Output disequilibrium

* Figures as per Economic Survey 2012-13

The above imbalance resulting into

diminishing returns can only be cured by
diverging the extra workforce to remaining
sectors i.e. secondary and tertiary. Since the
service sector requires more educated and
skilled manpower as compared to other
sectors, therefore, manufacturing sector can
only play vital role in seizing our
demographic dividend. And above all,
service sector in India has already played its
part by giving a handsome
sectoral
contribution of 64.8% of GDP (including
construction activities).
Moreover,
every
job
created
in
manufacturing has a multiplier or ripple
effect through indirect creation of two to
three jobs in the industries/ sectors that
supply (primary sector) and service (tertiary
sector) the manufacturing activity. For
China, South Korea, Taiwan and for most of

our more successful Asian neighbours, it

was the manufacturing expansion that
ameliorated the lives of millions of workers
and delivered growth dividends, lifting
entire economies into a new hemisphere.

The Current Signs of Distress

A. Burgeoning Current Account Deficit
(CAD): Indias CAD widened to a record
5% of GDP in 2012-13 fiscal, mainly due to
sluggish exports. In the quarter ending
December 2012, it reached an all time high
level of $33bn i.e. 6.7% of GDP.
B. Abysmal Performance: Indias GDP
growth has hit a decade low of 5% with
HSBC manufacturing Purchase Mangers
Index (PMI) at a 50- month low in May
2013, indicating that Indias industrial
recovery is moving sharply into reverse.
C. Mediocre Rankings: World Bank in its
Doing Business 2013 Report has ranked
India on 173rd position out of 185 countries
in starting a business and 132nd in case of
doing a business. On Goldman Sachs
Growth Environment Score (GES) 2012,
India with a meager score of 3.92/10 is
ranked 151 out of 183 countries.
D. Inordinate Delays in Land Acquisition:
Following long delay in land acquisition,
two steel majors- POSCO and ArcelorMittal
have scrapped their 6 million and 12 million
tonnes steel plant respectively, leaving
behind the impression of unconducive
economic climate in the country.
E. Depressing Index of Industrial
Production (IIP): IIP contains 682 items
clubbed in 399 groups: 1 in mining sector, 1
in electricity sector and 397 in

manufacturing sector and their respective

sectoral weightage stand at 14%, 11% and
75% approximately.
On account of flop show by manufacturing
sector, IIP contracted by 1.6% in May 2013,
lowest in the past 11 months, indicating the
urgency of manufacturing reforms.

Its the time to address the issues

India seriously needs to look on the
following aspects to uplift overall business
sentiments and to give fillip to investment in
manufacturing sector:
1. World Class Physical Infrastructure
In World Competitiveness Report 2013, India
finds a dismal 40th rank out of 60 nations,
mainly due to red-tapism involved in getting
environmental and forest clearances, land
acquisition and other hurdles faced by India
Inc and foreign entrepreneurs. Recently
constituted
Cabinet
Committee
on
Investment (CCI) for speedy clearances of
big ticket projects involving investments of
`1000 crores or more in sectors such as
infrastructure, manufacturing, etc. and the
success stories of Public Private Partnership
(PPP) projects in various backward states
are a step forward in this direction.

2. Flexibility in Labour Laws

Indias archaic and rigid labour laws are a

big hurdle, with 45 laws and 16 associated
rules at the national level and close to its
four times at the state level to monitor the
functioning of the labour market. The
possible solution lies in harmonizing these
various rules so as to make them flexible
and create greater private sector demand for
labour.
3. Attracting Foreign Direct Investments
In 2012-13, FDI inflows in India amounted
to $22.4bn, almost 5 times less than China.
Arent we suffering from Policy
Paralysis? Because even after lot of
hullabaloo, cap on FDI in multi brand retail
sector was raised to 51% in Sept. 2012, but
any encouraging response is yet to be seen.
Japanese companies which invested heavily
in China during last 3 decades are now
feeling overexposed. India needs to ensure
that it emerges as an alternative destination
for such companies.
4. Development of Micro, Small and
Medium Enterprises (MSMEs)
MSMEs have been defined in MSMEs
Development Act, 2006 based on the
investment limit in plant and machinery or
equipment as under:
Category

Manufacturing
Sector

Micro
Small
Medium

Up to 25 lacs Up to 10 lacs
Up to 5 crores Up to 2 crores
Up to 10 crores Up to 5 crores

Service Sector

(Amount showing investment in`)

MSMEs account for 8% of GDP, 45% of

manufacturing output and 40% of exports.
Albeit MSME sector falls in the category of

Priority Sector Lending, only 8% of total

bank credit, find its way into this sector.
Thus, there is a dire need of financial
inclusion in form of microfinance, venture
capital funding, etc. Being labour intensive,
MSMEs have the potential to absorb the
growing surplus of unskilled labour,
particularly in BIMARU states.
5. Diversification of Export Markets
If the manufacturing sector has to grow in
the range of 12-14% over the medium term,
exports have to register a growth rate of 2025% in real terms. Our main export
destinations are Western Europe and the US.
However, growth centers in the coming
decades are expected to be economies of
Africa and Latin America. It is pertinent for
Indian manufacturing companies to grab the
first movers advantage and look at tapping
these markets.
6. Development of Business Clusters
India needs to really focus on development
of business clusters to create an eco-system
of supply-chain responsiveness and lower
logistics cost. These clusters will converge
the advantages of higher innovation and
employment generation for smaller firms
with scale and cost advantage of larger
organisations and can potentially help in
eliminating the Bullwhip effect to some
extent. Their advantages are clearly visible
in pharma clusters in Andhra Pradesh and
knitwear clusters in Ludhiana.
7. Harnessing the power of Information
and Communication Technology (ICT)
Productivity is a function of innovation and
technology. But due to Indias miniscule

spending in R&D i.e. 0.9% of our trillion

dollar GDP, we have failed in culminating
the global best business practices. To add
fuel to the fire, researches reveal that our
thinking power has been hijacked. India is
on 66th position in Global Innovation Index,
2013. The best fit solution is to make hi-tech
applications affordable. Learning from the
example
of
Malaysian
Industrial
Development Finance which offers 75%
financing at 3% interest over 5 years for
SMEs to buy ICT applications, we have to
incentivize any action in this direction.
8. Stay Hungry, Stay Foolish
We need to explore all the plausible ways to
ensure that our unexplored core strengths
wont turn out to be the Achilles Heel.
Hand-in-hand, unorganised manufacturing
sector should also be given priority with
regard to its development and recognition.
Appropriate tax holidays, more SEZs,
enhancing single window clearance facility,
etc. can also attract mega investments.

Highlights of some recent Government

Initiatives
Since the crisis is systemic and, therefore,
it needs a systemic response. Following is
the gist of some recent responses from GoI:
i) National Manufacturing Policy (NMP),
2011: As mentioned earlier, its prime
objective is to enhance the share of
manufacturing in GDP to 25% and to create
additional 100 million jobs over a decade or
so. It also lays emphasis on promotion of
clusters and aggregation, especially through
the creation of 12 National Investment and
Manufacturing Zones (NIMZs).

ii)
FDI
Policy
Initiatives:
On
recommendation of Mayaram Panel, FDI
norms in 13 sectors have been liberalised,
indicating that reforms are underway. 100%
FDI is allowed in single brand retail trading,
49% of it can come through automatic route
and the balance through approval of Foreign
Investment Promotion Board (FIPB).
Currently, 51% FDI is allowed in multi
brand retail trading subject to certain
restrictions.
iii). E- Biz Project: It is a mission mode
project under the National e-Governance
Plan (NeGP) for promoting an online single
window for business users.
iv) Invest India: It is a joint venture
company between the DIPP and FICCI. It
will act as a structured mechanism to attract
investment by providing inputs on all
aspects of doing business in India to
prospective overseas investors.

The Way Ahead.

As wages rise and China evolves into a
high-cost economy, India need to fill the
vacuum to become the global centre of
manufacturing. A Boston Consultancy
Group (BCG) report reveals that India may
become 5th largest manufacturing nation if it
can accomplish the targets set out by NMP,
2011. We are still the beacons of light and
not the temples of doom since our
demographic dividend is our biggest asset.
Showing concerns over the economic
growth of the nation, Honble President Shri
Pranab Mukherjee has recently said
....Indian economy has resilience to
overcome the problems. We arose, we arise

and we will arise, provided we mustThink Global, Act Local.

References
1. Article on For a manufacturing
Revolution by Amitabh Kant in Times of
India dated July 11, 2013
2. Economic Survey 2012-13
3. Indian Economy 67th Revised Edition by
Gaurav Datt and Ashwani Mahajan
4. Book entitled Chanakyas New
Manifesto: To Resolve the Crisis within
India, authored by Pavan K. Verma
5. Mrunals Analysis of Chapter- 9 of
Economic Survey 2012-13:
http://mrunal.org/2013/05/economic-surveych9-industrial-performance-e-biz-investindia-manufacturing-policy-obicus-asi.html

My Details:
Name: Prateek Loonkar

Arthashastra