Manufacturing Problems in India

A Project By :

Syed Mohd. Aniq Chirag Vikam Mavia Kondkari Mayur Kulkarni Chakraveer Singh Mithilesh Pathak

44 18 37 38 17 43

Professor :

Prof. Garima Sharma

Rizvi Institute of Management Studies & Research

Introduction
Sustained increase in competitiveness of an economy is a hallmark of economic strength and stability of that economy. Worldwide, there has been an increasing awareness, especially among emerging market economies (EMEs), about the need to strive for improved competitiveness to face the realities of the globalised trading environment. In the case of India, such recognition is reflected during the recent years, particularly in the constitution of National Manufacturing Competitiveness Council. At the current juncture, the Indian economy is at the threshold of entering the big league through a crucial turnaround in its performance. Such a turnaround has been reshaping India's image as one of the emerging economic powers in the world. India has recognised the opportunities stemming from globalisation and accordingly revamped its policies to promote industry and services sectors. India's ability to compete on the global stage is amply demonstrated by the boom in information technology and software services. India has emerged as a destination for outsourcing of not only information technology enabled services (ITES) but also a host of other services including certain manufacturing activities such as automotive components, pharmaceuticals, textiles, etc. India is fast establishing its image as a competitive economy the world over, which assures low-cost and high-quality products. In the recent years, it has achieved certain landmarks in the manufacturing sector. Amongst them, the most important has been the rise of Indian MNCs, which have been on expanding mode and acquiring companies abroad and developing their production base in other countries. In addition, Indian firms are exporting services ranging from call centres to medical diagnostics and tutoring American high school students. In this backdrop, Indian economy could be larger than all the countries in the world other than the US and China in another 30 years and India's growth will remain above 5 per cent through the period (Goldman Sachs, 2003).

Problems
Sector Specific Issues
Lack of strong patent protection is a deterrent to attract sizeable investment in R&D, foreign direct investment (FDI) and introduction of newer and better products in the drugs and pharmaceuticals industry. Deferred or delayed payments, non-availability of power, and lack of orders/demands are problems plaguing most of the sugar industry, which needs to be addressed urgently. High tariff barrier coupled with stringent sanitary and phyto-sanitary measures, including animal health and residues of contaminants by the export destination countries like Europe and the US affected the domestic production and export competitiveness of the Indias milk products. Indias low quality and low technology intensity of exports are more vulnerable in the competitive environment, which needs to be improved with quality products and the share of high technology intensity exports to be increased. Basic infrastructure, particularly transport infrastructure is vital for any products to compete in the market, which needs to be improved to attain cost competitiveness. Business environment also needs improvement by eliminating procedural hurdles to attract more investment in the manufacturing sector, particularly FDI.

SME Sector related Issues

Historically, India has had a highly fragmented industrial structure. The manufacturing sector in India is characterised by a significant number of small scale and unregistered manufacturing firms. The Small and Medium Enterprises (SMEs) sector in the Indian economy has been a very vital organ and it has a share of over 40.0 per cent of the gross industrial value added in the economy. About 44 per cent of the countrys exports directly or indirectly pertain to this sector. Given its contribution in the export basket of the country,

improvement of competitiveness of the manufacturing sector is not possible without paying adequate attention to the SMEs. Small Scale enterprises in India have received significant preferential treatment both in terms of specific sectors being reserved exclusively for them and in terms of preferential excise and other fiscal concessions. Since the preferential treatment is contingent on these units remaining small, there is no incentive for these units to expand eroding the competitiveness of Indian manufacturing. This has prevented Indias market size from being translated into scale for manufacturing. Industry research institute interaction is low in India, thereby reducing the chances of creation of commercially viable technologies. Indias huge potential lies in the SMEs to expand employment opportunities further develop the industry and boost the exports. But, there is no broad-based market information network to coordinate and develop the SME sector. There is an urgent need to develop more industrial clusters to facilitate better information network among the SMEs. Unavailability of information on the reliability of potential buyers and sellers tends to increase transaction costs. There is significant scope for improving productivity levels in different manufacturing industries through cluster approach. On the lines of identified SSI clusters, clusters may also be identified for other manufacturing sector with improved infrastructure facilities that may improve the competitiveness of the industries. At present, about 114 commodities are reserved for exclusive manufacturing by the SSI sector. Production of some of these items requires modernisation and technology upgradation to achieve economies of scale and dereservation alone would help enhance competitiveness of these products. Removal of all restrictions on investment in labor-intensive small-scale industries needs to be done. The control has led to various sets of inefficiency in these industrial sectors. There is a need for improving appropriate linkages with education, infrastructure, human and natural resources and environment for long-term sustainable development and facilitating value-addition and self-reliance approach towards manufacturing.

Liberalisation of Labour Laws

The economic reforms that started in the 1990s have left the labour market untouched, which has led to various problems such as lower productivity, inefficient allocation of resources, etc. Rigid labour laws have resulted in underinvestment in some industries such as textile industry. Indias inflexible labour law is not market driven; thus, the problem of unskilled labour and its low standard reduces the competitiveness of the country. Simplification of laws relating to retrenchment, and replacement of non-performing workers at a time when the unit is in trouble could enable the reorganisation/ consolidation in the industry. So, it becomes important that labour reforms be carried out in order to accelerate investment, enhance productivity, competitiveness and employment generation in the economy.

Research and Development Efforts

Science and technology sheds light on countries technological base - the availability of skilled human resources, the competitive edge the country enjoys in high-technology exports, sales and purchases of technology through royalties and licenses, and the number of patent and trademark applications filed. India lags behind a number of economies in terms of manpower for research and development as well as efforts towards R&D

FICCIS REPORT March 2011

FICCI has conducted its Quarterly Manufacturing Survey for the quarter JanuaryMarch 2011 (Q-4). The survey has tried to gauge the expectations of manufacturers for Q-4 from major sectors like textiles, capital goods, metals, chemicals, machine tools, tyres, cement, consumer electronics, automotive, leather & footwear, paper, forging etc. Responses have been drawn from over 400 manufacturing units belonging to both large and SME segment.

Growth Scenario
Overall the sentiments and expectations of manufacturing sector for Q-4 have seen a dip vis-a-vis last quarters. In the survey, 60% respondents reported that they expect higher growth in their sector for Q-4 vis--vis Q-4 2009-10. This is a significant fall with regard to previous two quarters in which around 68% (Q-3) and 71% (Q-2) respondents felt that they were expecting higher growth in their sectors. Around 77% respondents feel that the growth in the manufacturing sector is going to moderate for Q-4. While a number of factors are constraining the growth of manufacturing sector, but most important being the rise in the cost of capital due to monetary tightening measures of RBI. Below, we have given the response on RBIs monetary tightening measures.

Cost of Finance
Hike in the policy rates of RBI in the last few months has significantly affected the cost of borrowing for manufacturers. In Q-4, over 34% respondents reported that their cost of borrowing has increased significantly in last two to three months. Around 43% respondents felt that the hike in policy rates had a moderate impact on their cost of borrowing. But compared to previous Quarter (Q-3) the situation has worsened. In Q-3, as per FICCI Survey, only 13% respondents felt that their cost of borrowing had increased significantly, whereas in Q-4 34% respondents are feeling the heat of rising interest rates. Sectors where the impact is seen the most are Automotive, Cement and Tyres.

Impact of Hike in RBI Policy Rates on Cost of Financing

Quite a few respondents in the survey have reported that uncertainty in economic environment has increased further. Over 40% respondents of the survey reported that economic uncertainty is acting as a significant constraint

for the growth of the sector. Another 28% respondents saw economic uncertainty as a moderate constraint for the growth of the sector.

Capacity Utilization
In terms of capacity utilization there is not much difference or variation between Q-4 and Q-3. In Q-4, around 53% respondents reported that they were operating at higher capacities vis--vis last year, as compared to 52% in Q-3. Similarly, around 32% respondents reported that they were operating at same level of capacity utilization as last year in Q-4- same percentage as in Q- 3.

Capacity Addition
In terms of capacity addition, around 52% respondents plan to have capacity additions in next 6 months. However, a significant proportion i.e. 48% still feels that there are number of constraints to capacity additions. Sectors where majority of the respondents reported that their capacity additions are not coming through significantly are textiles and steel. In other sectors like Automotive, Capital Goods, Machine Tools, Leather, Chemicals, Cement, Paper and Forging there is going to be moderate increase in capacities.

Order Books
The demand conditions for manufacturing sector in Q-4 is similar to that in Q-3. In both the quarters around 54-55% respondents have higher order books for the quarter compared to previous quarter.

Employment
Around 44% respondents reported that they intend to increase their workforce in next 3 months. Sectors where majority of the respondents intend to hire new workforce are Automotive, Tyre, Leather, Capital Goods, Electronic Goods and Forging.

Sectoral Growth
Looking at growth expectation in different sectors, five out of fourteen sectors in the survey are likely to witness strong growth of over 10% in Q-4. These sectors are Capital Goods, Automotive, Machine Tools and Consumer Durables. For three sectors namely Chemicals,

Forging and Tyre growth is likely to be moderate (between 5 to 10%) in Q-4 as compared to last year. Sectors like Cement, Paper, Steel, Metals, Textiles and Miscellaneous are likely to witness low growth of less than 5% in Q-4.

Exports
Exports seem to be picking-up for the manufacturing sector in Q-4. Over 54% respondents reported that they are expecting higher exports in Q-4 vis-vis last year. Almost, all the sectors are expecting growth in their exports for Q4 vis-a-vis last year.

Manufacturing to contribute 25 % of GDP within a decade

- Hindu Business Line The Union Cabinet on Tuesday gave its approval to the long-awaited ambitious National Manufacturing Policy (NMP), which seeks to set up mega industrial zones, create 100 million jobs by 2022 and put India at par with manufacturing powers like China and Japan. The NMP seeks to enhance the share of manufacturing in the GDP to 25 per cent within a decade and create 100 million jobs in manufacturing as part of the inclusive growth agenda of the UPA, an elated Commerce and Industry Minister, Anand Sharma said after the Cabinet meeting chaired by Prime Minister, Manmohan Singh. Ruling out any kind of subsidies for units operating in these manufacturing zones, the newly approved policy states that to encourage the manufacturing sector, the government will provide fiscal incentives to the industry, particularly to the small and medium enterprises (SMEs). The NMP had faced hiccups in the Cabinet on September 15 when the Labour and Environment Ministries had raised objections to certain clauses being waived pertaining to their Ministries. The Prime Minister later referred the matter to the Group of Ministers (GoM) headed by Agriculture Minister, Sharad Pawar. Mr. Sharma said the NMP will ensure compliance of labour and environmental laws while introducing procedural simplifications and rationalisation so that the regulatory burden on the industry is reduced. He said the interventions proposed are generally sector neutral, location neutral and technology neutral, except the attempt to incentivise green technology for sustainable development. No subsidy is proposed for individual units or areas. The basic thrust is to provide an enabling environment for tapping the potential of the private sector and the entrepreneurial skills of the younger population, the Commerce and Industry Minister said.

The major objectives of the NMP are to increase the sectoral share of manufacturing in GDP to at least 25 per cent, create 100 million jobs by 2022 and enhance global competitiveness of the sector. Besides, it focuses on domestic value addition, technological depth and environmental sustainability of growth. The policy envisages specific interventions broadly in the areas of industrial infrastructure development and improvement of the business environment through rationalisation and simplification of business regulations. Besides, development of appropriate technologies, especially green technologies for sustainable development, and skill development of the younger population are envisaged. The NMP aims at creating large integrated industrial townships National Investment and Manufacturing Zones (NIMZs). The land for these zones will preferably be waste infertile land, which is not suitable for cultivation; not in the vicinity of any ecologically fragile area and with reasonable access to basic resources, Mr. Sharma remarked. The contribution of the manufacturing sector is just over 16 per cent of India's GDP, currently. With a view to accelerating the growth of the manufacturing sector, Mr. Sharma said that the manufacturing policy proposes to create an enabling environment suitable for the sector to flourish in India.

India story is about manufacturing

- Hindu Business Line While IT and services have been the poster boys of the India's success, manufacturing has made giant strides albeit quietly. From auto to telecom to metal castings, India is emerging as a global hub, at China's expense. IT is an ill wind that blows no one any good. The sustained and steep fall in the exchange value of the rupee, for instance, is just the kind of crisis which actually holds a golden opportunity within it. The precipitous fall of the rupee against the dollar may be bad news for the economy as a whole and for import-dependent industries, but it may turn out to be just what the doctor ordered for Indian manufacturing. The fall in the value of the Indian currency has not happened in isolation. As the rupee has fallen, so have other currencies while yet others have appreciated during the same period. But as far as India is concerned, what should be of major interest is the appreciation of the Chinese Yuan versus the dollar. YUAN FACTOR Since 2005, since China removed the yuan-dollar peg, the Chinese currency has appreciated at over 4.5 per cent per year. In fact, if one leaves out the 2008-2010 period, when the yuan's value was frozen in the wake of the global financial meltdown, the appreciation works out to 7 per cent per year. This is not to say that the yuan is realising its actual value. In fact, the artificially low level of the yuan had helped Chinese manufacturers and infrastructure providers make giant inroads into the Indian economy, and tilted the balance of trade sharply in China's favour. Nevertheless, over time, China would find it increasingly difficult to prevent its huge trade surplus with not just the US, but most

major global economies, from reflecting in the value of its currency. In fact, other nations are increasingly coming together to force China into a more realistic foreign exchange rate. For instance, India, the US and Japan are meeting in Washington later this month to discuss common concerns including the rising economic power of the dragon kingdom. The Japanese are particularly paranoid, especially as their manufacturing competitiveness gets eroded at a faster rate. And India figures largely in the de-risking strategy, as Japanese manufacturers try to reduce the criticality of their China exposure. Combined with US fears over their growing trade imbalance with China, this has led to a global shift in attention towards India as an alternative centre for manufacturing. DESTINATION INDIA This has led to some remarkable changes in the Indian manufacturing scenario. While IT and services have been the poster boys of the India growth story, especially in overseas markets, India's manufacturing sector has been taking giant strides albeit quietly. This is leading to some surprising changes in sourcing for global players, in a wide spectrum of industries. Japanese automobile manufacturer Nissan, for instance, has decided to make India its global production hub. Of the 185,000 units it has manufactured so far from its new Chennai plant, for instance, barely 35,000 have been sold in India. The rest have been exported. As it ramps up the capacity of its India unit to 400,000 cars a year, it is planning to service even more of its global markets out of its Indian manufacturing hub. Handset manufacturer Nokia has also bet big on India. As was pointed out by this paper recently, it's Sriperumbudur manufacturing facility in Tamil Nadu is its largest in the world. And over time, it has started sourcing a variety of components, ranging from numeric pads to chargers, locally as well, leading to a

corresponding expansion in scale for these vendors as well. Or take metal castings. US castings imports are moving out of China but not back to the US. Increasingly, Indian die casting manufacturers are acquiring work away from China for products which are ultimately destined for US markets. In iron castings, US imports from China in 2010 rose 2.6 per cent ($5.5 million). But similar imports from India rose by a whopping 30 per cent ($19.8 million). DENIM PRODUCTION Perhaps the most inspiring story of how Indian manufacturers are taking on Chinese competition comes from the textile sector. While rising crude prices and predatory pricing by Chinese manufacturers have hammered man-made fibre manufacturers, Indian denim manufacturers have become a global force. The demand for denim, which has moved on from being merely the fabric from which jeans were manufactured to becoming the global youth apparel fabric, has been growing strongly, despite recession in major denim markets like the US and Japan. So much so, Indian denim manufacturers, who have already logged two quarters of strong bottomline growth, are expecting even better times ahead. While domestic cotton prices, the main raw material for denim fabric, have been a big factor Indian cotton prices are significantly lower than global prices and are expected to stay soft on the back of a bumper cotton crop China's declining competitiveness in denim has been an equally important factor. Though India and China were both considered cheap denim destinations, India has been gaining an edge over China, as inflation and rising labour costs, coupled with high cotton prices and a rising yuan, have made the Chinese less competitive. While major denim buyers like Wal-Mart and VF Corporation are now looking to India for denim, some Ahmedabad-based denim makers have even managed to turn the tables on their Chinese counterparts, and are selling denim at up to 20 per cent lower

prices than Chinese denim manufacturers to Chinese jeans manufacturers! This is the time for the government to stop hand-wringing over the rupee and stop listening to lobbies pushing for various temporary sops, which will only help import-intensive domestic manufacture. Instead, we need to provide clear policy support and fiscal incentives to the neglected manufacturing sector. Just like the Indian farmer, the Indian worker has proved time and again that he is globally competitive. While Indian engineering and automobile sector workers are matching their European and Japanese counterparts in terms of quality of output, our denim factories, or mobile phone component manufacturers or casting industry workers have shown that they can take on the mythical hyper-efficient, hyper low-cost Chinese worker and win. That they have managed to do so without policy sops or subsidies or government hand-outs makes this success story even more remarkable. It is time our policymakers also recognised this and lent a helping hand.