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Indian manufacturing can grow at double-digit rates: Dr Pawan Goenka

22 Apr 2022

Press release for Pawan Goenka session

One should not worry too much about the percent contribution of manufacturing to the GDP, instead one should focus on double-digit growth of manufacturing over the next 5-7 years, says Dr Pawan Goenka, former Managing Director and CEO of Mahindra & Mahindra and now the Chairperson of the Ministry of Commerce & Industry’s Steering Committee for Advancing Local Value-add and Exports (SCALE).

Speaking at AIMA’s Management Cafe programme, Dr Geonka said that a 10%-12% manufacturing growth is do-able from the pre-covid levels. “If we invest in the sector where there are export opportunities, we will definitely get there,” he said.

To achieve double-digit manufacturing growth, Dr Goenka said, India needs to invest in three kinds of sectors - first, the sunrise sectors such as solar panels, electric vehicles, drones and CCTVs; second, the tech sectors such as space and medical devices; and third, the job generating sectors such as auto, furniture, textiles, toys etc. “It is not that difficult to get to 10%-12% growth rate in manufacturing, but we have to keep in mind technology, quality and competitiveness,” he said.

Mr Shrinivas V Dempo, Senior Vice President, AIMA & Chairman, Dempo Group of Companies, moderated the discussion with Dr Goenka on making India a manufacturing powerhouse. Mr Rekha Sethi, Director General, AIMA anchored the session.

Mr Dempo enquired about the possibility of achieving the targets of creating a $1 trillion manufacturing economy while doubling India’s exports and halving imports in 5 years. Dr Goenka said that India cannot become a manufacturing nation by focusing on domestic demand and localizing imports and the only way to have double-digit manufacturing growth for multiple years was to cater to the global markets. That, he said, has three requirements - local technology, quality and cost competitiveness.

He pointed out that there has been little technology development in Indian industry and most of the technology is imported, including in the auto sector. “Being only a manufacturer is not enough to add value to the economy,” he said. He pointed out that R&D constitutes only 1.5% of India’s GDP compared to 3.5%-4% in the successful manufacturing countries. “We must own the technology,” he said.

Indian labour may be considered cheap but it does not give India a cost advantage, Dr Goenka said. He pointed out that labour cost in India forms only 4%-10% of the total manufacturing cost in India. “That cannot make you competitive,” he said.

Mr Dempo raised the issue of labour productivity in India and the use of technology to make Indian labour more productive. Dr Goenka argued that Indian labour’s productivity cannot be compared with that of major manufacturing countries because of Indian industry’s much lower level of automation. “It is not that Indian labour is less productive, Indian processes are less productive,” he said. He also argued that Indian industry cannot win by negotiating hard for lower wages. However, he said, Indian labour is becoming a constraint because of it is not up to the mark for Industry 4.0. He said that reskilling workers of the MSMEs was the key, as MSMEs contribute 60 per cent of the value add even in the automotive industry.

On cost competitiveness, India’s real challenges are logistics, electricity, land and scale, according to Dr Goenka. He pointed out that India has a 5% cost disadvantage on account of logistics against countries like China and Vietnam. While this additional cost does not make a difference in the domestic market because everybody’s costs are the same, it makes India uncompetitive in the global market, he said. The cost of industrial power in India is higher than in most manufacturing countries because the industry pays for those who get free power, Dr Goenka said. “The subsidy has to come from the general fund of the Government of India and not the industry,” he said. He also argued that the land costs for setting up a new factory in India are the highest in the world and without government support it is impossible for a new unit to be profitable.

Lack of scale among Indian manufacturers is a key constraint on India’s export competitiveness, Dr Goenka said. He pointed out that while India’s auto industry is among the top 5-6 in the world, only one Indian auto maker figures among the top 50 in the world, that too because of overseas production. The per unit fixed costs are higher in India because nobody has the scale, he said. Dr Goenka said that Indian industry must build capacity before there is demand. “Demand comes to those who have the capacity,” he said, adding that once demand comes and one takes two years to build capacity, the demand goes elsewhere. He gave the example of setting up of a 1100 acre industrial park in Tamil Nadu to make furniture only. He pointed out that the global furniture market is worth $50 billion whereas Indian furniture industry’s revenues are merely $0.5 billion because of domestic focus and lack of use of machines in manufacturing.

Emphasizing the importance of R&D in manufacturing growth, Dr Goenka, who chairs the boards of two IITs, said that while the quality of research at India’s top institutes is very high, it is aimed at producing research papers and not products. Also, Indian industry does not believe that academic institutions can do the R&D that they need and they would rather license technology and stick to manufacturing, he said. However, startups are bridging the gap between the academia and industry by working with academic research to develop products. He said that Indian industry should learn from the auto sector where local companies have succeeded by investing in R&D for business reasons and not only because of weighted tax deductions on R&D.

Talking about his role as the Chairman of Indian National Space Promotion Authorization Centre (IN-SPACe), Dr Goenka said that ISRO alone cannot exploit the full economic potential of space technologies in India and the government has opened it up for the private sector. He pointed out that while the global space business is worth $400 billion, India’s share of it is only 2% at $7 billion. “The idea is to take this $7 billion to $40-45 billion,” he said. He pointed out that more than 50 Indian startups are already working on space technologies such as rocket launchers and satellite design and manufacture. He said that India is open to the overseas companies coming into the sector.

Regarding Indian auto sectors pivot to electric vehicles, Dr Goenka said that EVs are already here and the technology for the two and three wheelers is simple. “There is no commercial disadvantage is buying such EVs,” he said. However, it will take time for the industry to move to electric four-wheelers because the pay back on those is still not there unless one drives 100 kms a day. He pointed out that Indian government’s support for the EVs is greatest in the world with only 5% GST on EVs compared to 50% on ICE vehicles, Rs 1.5 lakh benefit on EVs, and the PLI incentive to EV makers. The key to mainstreaming of EVs is localization, as most of the EV components are imported. Dr Goenka said that Indian EV makers need not compete with Tesla but they can make vehicles that Indians want, which can also be sold in many other countries. “India’s auto sector can become a global supplier of components, technology and products,” he said.

The session was also live streamed on AIMA’s social media channels and more than 550 people logged into to hear Dr Goenka.

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