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Indian manufacturing: Time for a revolution, not restoration

Moneycontrol

Indian manufacturing: Time for a revolution, not restoration

Moneycontrol, 9th June, 2020

India’s manufacturing sector has failed to keep up with the growth of the general economy and its share of the country’s output has shrunk to about 15 per cent. Since the 1990s, India’s economic policy makers have given all their love to services and manufacturing has receded to a second-class status in the economy. Weak incentives and lopsided trade deals have ensured that India’s consumption growth has not benefitted Indian manufacturers much.

Much noise has been made over the past decade about restoring manufacturing to its position of the creator of jobs and economic stability, but much of what has been done has failed to impress investors.

Make in India has been a non-starter. Though some high-profile smartphone makers have set up assembly and packaging operations in India, there have not been many recent success stories in manufacturing. The lure of India’s large domestic market and its vast, cheap labour has not created a stampede.

There are three things that India must do to get manufacturing going and contribute at least 25 per cent of the GDP as desired by successive governments in the past decade.

First and foremost, make it predictable to do business in India. The highest priority for any investor is to trust that the referee will not change the rules of the game midway, at least not without warning.

There have been many reforms in the past few years that have raised India’s ranking in the ease of doing business by about 100 positions. Still, Indian manufacturing has barely stirred. Many of the decisions have created more scare than enthusiasm because of their suddenness and arbitrariness. Investors need long-term stability of terms of doing business more than immediate ease before committing billions, especially in greenfield projects. The pileup of NPAs in the infrastructure sector is a cautionary tale.

For Make in India to succeed, India has to make up its mind. Starting with the GARR proposal of 2009, India’s economic policy making has been dictated by the state’s priority of blocking tax leakage and increasing its tax revenue. Surveillance and scrutiny of business have overtaken the promotion and support of investment. The concern for environment has also been applied bluntly to make it difficult to set up new factories.

The government has done a lot to lower the cost of doing business; for example, the recent bait of 17 per cent tax for investment in manufacturing if production begins before October 2023. Many state governments have curtailed or suspended labour protection laws to sweeten the deal. However, investors are alarmed by the suddenness and arbitrariness of these decisions. They want peace of mind more than today’s deal.

The second thing that India needs to make manufacturing boom is digitization and automation of manufacturing. New technologies always expand industry by bringing in new innovators, new investors and better workers, which leads to creation of new demand, output and jobs.

The covid crisis has created a window of opportunity for rapid induction of technology in manufacturing. Each crisis breaks down resistance to change and the scars of crisis convince all stakeholders to ensure that they do not suffer the same fate again.

The lockdowns highlighted the vulnerability of production to disease and bans. Even as factories reopen, they have resumed with only partial staff and production. The more automated and connected factories have fared much better and their employees have continued to work and get paid.

Lesson learned, most manufacturers are re-evaluating the capital-labour equation. As shareholders come around to accepting extra initial cost for the sake of uninterrupted revenues, the demand for digitized, automated manufacturing is set to boom. Indian manufacturing cannot afford to be out of sync with this global shift.

Of course, automation will prevent restoration of a lot of the jobs lost to the covid disruption. A lot of older workers will have to find alternative occupations or get retrained to compete with younger, digital-native workers.

We must ensure that in certain strategic areas, India insists on high local value addition so that not only will it get the latest technology, it will also lead to the upgrading of our workers’ skills. Like China forced Airbus to make passenger planes and GE to make jet engines locally, the size of our market gives India the leverage to get those who wish to participate in our markets, manufacture a greater proportion of their components and products in India.

In fact, this change is a great opportunity for Indian manufacturing to eat into the service sector’s revenues. As habits of social distancing and touchless consumption develop, the demand will shift towards products that can be installed, used and serviced via internet-of-things. Digitization of products would allow manufacturers to have direct relationship with the users and get more for their output by turning products into services. Industrial customers would prefer having digital twins of their critical equipment with the manufacturers for remote performance control and predictive maintenance.

The third thing that India must do to make manufacturing a big part of its economy is make it easy to import and export. Domestically oriented manufacturing is always inefficient and inflationary. Protection from predatory practices of foreign competitors is necessary but a greater priority has to be given to making trade deals to pre-empt such practices.

Indian companies need encouragement and support for both exporting from India and manufacturing overseas. Unless Indian manufacturers become integral to global supply chains, their ability to absorb the best technologies and make the best products at best prices will remain limited. Ultimately, the most open economies make the fiercest competitors.

Giving manufacturing the highest priority is the only way to revive Indian economy and keep its growth stable. Covid has created an opportunity for a reset of the manufacturing sector and India cannot afford to let this opportunity slip.