Friday, 19 August 2011

Manufacturing Sector in India

Manufacturing is the organised activity devoted to the transformation of raw materials into marketable goods. The outputs from one manufacturing system may be utilised as the inputs to another. 10 A manufacturing system is, therefore, a typical input-output system.

Manufacturing sector is the backbone of any economy. It fuels growth, productivity, employment, and strengthens agriculture and service sectors. Additionally, manufacturing sector also safeguards the national economic security, because large economies with a sizeable home market cannot afford to become dependent on imports for vital industrial products. They must foster domestic manufacturing capabilities and capacities in order to create the foundation of skills and the infrastructure of national security and prosperity.

Indian Manufacturing sector comprises: Capital Goods & Engineering; Chemicals, Petroleum, Chemicals & Fertilizers; Packaging; Consumer non-Durables; Electronics , IT Hardware & peripherals; Gems & Jewelery; Leather & Leather Products; Mining; Steel & non-Ferrous Metals; Textiles & Apparels; Water Equipment.

India is fast emerging as a hub for global manufacturing. A study by US Council on Competitiveness ranked India second in manufacturing competitiveness (China placed 1st). It has been said that manufacturing could overtake services as the engine of growth. There are many factors that are fuelling this development:
-       Growing workforce- demographic dividend
-       Vast English-speaking workforce
-       Engineering talent: The country is getting recognised for high value goods that require engineering precision and quality
-       Low labour costs: in the context of rising labour wages in China
-       India’s domestic market: by 2025 India will become the fifth largest consumer market of the world, according to McKinsey Global Institute.
-       India’s subcontinental size: Size and Strategic geographical position: ability to service markets from South East Asia to West Asia and even Central Asia. India is being increasingly developed by various companies as a supply point for Asian markets
-       All these factors assist India in operating in the export market with ease

Nonetheless there are many challenges to overcome before this potential is realized:

-       Build world-class infrastructure (power, connectivity, distribution chains) - China and the competitor South-east Asian nations all have better infrastructure than us.
-       Use of primitive technology or under utilization of technology - Can learn from China which incentivizes foreign investors to transfer technology.
-       Official paperwork and regulation are still onerous- India ranked 134 in the ‘Ease of Doing Business Index 2011’ (prepared by World Bank), and sadly its rank is reducing instead of improving. Thus GOI needs to create a more enabling climate to support enterprises and businesses. A liberalized regulatory framework which will attract investors.
-       Reform of land acquisition laws
-       Tendency of workers to strike: Companies have now found ways to work around this by hiring and nurturing workers unlikely to join a union. Companies seek out villagers with scant opportunity or experience, often women.7
-       Thus labour reform is critical- to ensure that employers will invest to upgrade their workers’ skills, and job security, social benefits- this will inturn improve productivity and produce globally- valued goods. Inclusive growth is delivered far more effectively from labour empowerment.
-       Unorganised sector provides 90% employment but generates less than 1/3rd of manufacturing output. This creates sharp inequality between per capita output and wages also. There is also a stagnancy in per capita real wages.
-       Further any growth in compensation has heavily favoured the management as against the shopfloor workers, further discouraging them. Parity in wages will help retain technologists in the production process, which will increase productivity.
-       Mass-scale absorption of underemployed farm labour into factories is required, to realize poverty alleviation. Normally manufacturing sector is the main absorber of mass unskilled farm labour. However in the Indian case dependence of workforce on manufacturing as hardly changed.
-       Indian manufacturing is material intensive with total value added being barely 20% of output value.  In US the total value added is equal to half the output value compared to only 1/5th in the case of India. If the Indian manufacturing sector is unable to increase the value added to intermediate goods, then a systemic restructuring is in order.
-       Improvement in technical and vocational education.
-       Support of SMEs
-       India's emergence as a manufacturing hub comes as multinationals look for alternatives to China. However competition from other south-east nations (Thailand, Malaysia, Cambodia) exist.

To improve efficiency and potential of this sector, GOI is discussing a National Manufacturing Policy. The main aim is to increase the contribution of manufacturing to GDP from present 16% to 25% by 2025, and create 100 million additional jobs by 2025. One of the major components would be the creation of National Investment and Manufacturing Zones (NIMZ) which are envisages as mega investment regions equipped with world-class infrastructure. However all developments have to take adequate care of environment and labour welfare concerns.

Related points of interest:
-       The usual first wave of low-cost manufacturing — the making of toys, electric kettles and television sets, among other wares — will remain out of India's reach because it is hard to run Indian factories on the large scale that China does. But a vast middle segment of factory goods relies on a mixture of technical skill and low-cost labor, and here India can supplement China, experts say. Not toys, but cellphones. Not hangers, but bras. Not patio furniture, but car parts. Not synthetic shoes, but leather ones.

-       Increasing manufacturing sector is critical to job-creation. Job creation has clearly not kept pace with GDP growth. The GDP growth increased to 8.6 percent during 2005-10 from 6 per cent during 2000-05, but the net addition to jobs remained almost flat at around 27 million during the two time periods. Combined with a decline in the number of self-employed persons, this sharply reduced the employment intensity (number of employed persons per lakh of real GDP) to 1 during 2005-10 from 1.7 in the preceding five years. 4

1.     “Boost Manufacturing”, The Times of India, 29/6/2011
2.     “Paying a heavy price for ignoring manufacturing sector”, The Hindu,
3.     “Manufacturing hub called India”, The Business Line, 23/5/2011.

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