What ails Indian manufacturing? Industry captains speak their minds

The manufacturing sector has been languishing long before coronavirus, despite the intended push from Make-in-India; Business Standard attempts to find out why

What was the thrust of his argument when Reliance Industries chairman Mukesh Ambani recently said that India needs to  rethink and reinvent manufacturing? Perhaps the sector's journey the past six years will provide some insight.

The Make-in-India programme launched by the Modi government in September 2014 aimed to raise the share of manufacturing in GDP to 25 per cent in 2022, from around 16 per cent at that time. However, the share crashed to 11.83 per cent in the first quarter of 2020-21.

Manufacturing contracted by a sharp 41.1 per cent in net sales during the quarter, according to information from the Reserve Bank of India on 1,619 listed firms. Pharma was the only industry whose net sales grew during this period.

Q1 may be an exception as manufacturing GVA contracted 39.3 per cent.

But the share of manufacturing in GDP was less than 15 per cent even in the previous three quarters. It stood at 14.13 per cent in the first quarter of 2019-20, declined to 13.97 per cent in the second quarter and further to 12.84 per cent in the third. From there, it rose a bit to 13.67 per cent in Q4.

Manufacturing growth has been declining since the second quarter of 2019-20, though not as much as in Q1 of this year. It contracted 0.6 per cent in Q2 of the previous year, 0.8 per cent in Q3 and 1.4 per cent in Q4. It had, however, risen three per cent in the first quarter of 2019-20.

In volume terms, a number of manufacturing segments plunged even before the first quarter of the current financial year. For instance, manufacturing of motor vehicles, trailers and semi trailers declined 18.5 per cent in 2019-20, while that of other transport equipment contracted 6.2 per cent. Let's take other examples: manufacturing of computer, electronic and optical products fell by 11.3 per cent, that of electrical equipment by 4.2 per cent.

Ambani's comment cited above was in response to a query on manufacturing by Maruti Suzuki chairman R C Bhargava at the event to release N K Singh's autobiography, titled 'Portraits of Power: Half a Century of Being at Ringside'.

When asked what is ailing manufacturing in India, Bhargava told Business Standard the even today, doing business in the country has not ever been easy.

He points out that if cost of production is lower and uncertainties are removed, companies will set up manufacturing units.

"There are lots of policies that add to costs of production in India. There are no coordinated efforts by the Centre and states to reduce these costs. Lots of policies are related to states and not the Centre," Bhargava said.

He said for investments to grow, demand needs to grow. For instance, he explained, if 100 units of a company are in demand, why would it produce 110?

"There are lots of things that are not letting this demand grow, including high taxes on products," he pointed out.

When reminded that the government lowered corporation tax rates from last financial year, he said that was a good move but not good enough. "There have to be more profits because corporate tax is on profits. If profit making is reduced, the aim of lower corporate tax rates reduces to that extent," Bhargava explained.

To a query that the government is trying to woo industries wanting to shift from China or are strategising to look beyond China, he said companies will set up manufacturing in countries where they find it easier for them to do businesses, manufacture quality products, and make profits. "It is not as if they will come because we want them to come. They will go to those places that are more suitable for them to do well in the long run," he said.

In his book, Getting Competitive: A Practitioner's Guide for India, Bhargava pointed out that the country has failed to espouse industrialisation as a vehicle for bringing about economic growth and social equity in a country in the last 70 years.

"Not one party is responsible for this," he clarified.  

Pawan Goenka, the managing director of Mahindra and Mahindra Limited, said global supply chains are going through a restructuring and this brings an unprecedented opportunity for India to grow its manufacturing.

"However, this will require some aggressive strategy from the Indian manufacturing industry and disruptive thinking from the government to support manufacturing and attract investment in India from those who are realigning their supply chain," said Goenka, who is also the Chairman of CII Mission of Atma Nirbhar Bharat.

Suggesting steps to be taken for this, he said Indian businesses have to invest in manufacturing capacities to attain global scale.

"We need to make Indian manufacturing cost-competitive to become part of the global supply chain -- this will require action both from the government and from the businesses. India has structural disadvantages in many areas these have to be levelled," he said.

Goenka further suggested that plug-and-play infrastructure has to be created under the public private partnership model.

He added that some of the free trade agreements need to be restructured to facilitate manufacturing export.

He said micro, small and medium enterprises (MSMEs) have to be supported to improve capability and be made part of the value chain.

"Right skills have to be developed and for long-term sustainability significant investment has to be made in R&D and technology by Indian manufacturing industry," Goenka said.

Ajay Shankar, former member secretary of the National Manufacturing Competitiveness Council, said the ambition to boost manufacturing has been there, but the thinking-through and implementation of measures that would make it possible have not been adequate.  

"We have not thought through seriously why we have not succeeded and what we need to set right to succeed in encouraging manufacturing in India," he said. 

He said there are many things that need to be done together. "Unless you get all the building blocks right, you are unlikely to succeed," he pointed out.

Elaborating, he said for instance you need to avoid real exchange rate appreciation of the rupee. 

"RBI has said that over the last decade we had roughly 19 per cent real exchange rate appreciation. This is equal to 19 per cent lowering of import duties. Essentially you are creating conditions for de-industrialisation or reduction in value addition," Shankar pointed out. 

The only countries which have succeeded in the post-world war 2 period in catching up have been South Korea and China. Both followed the policy of keeping the exchange rate artificially depreciated, he elaborated.  

"When they (South Korea and China) faced US pressure they appreciated their currencies somewhat. We have on the other hand we have the view that a strong currency means a strong economy. But it works against manufacturing and job creation," he said.

The second big thing is the cost of doing business in India, he said adding this is much higher than it should be. 

"For instance, we tax petrol and diesel at over 50 per cent.  Cost of transport is as a result is so much higher. We have delayed Railway modernisation. As a  consequence goods transport is mostly done through roads even though it is more expensive than on railways," Shankar said. 

All over the world, transporting goods through roads is more expensive than through Railways. Globally the share of Railways in goods transport is 55 per cent, but it is declining in India, he said.

Then, we have allowed a real estate price bubble to emerge in the country. "So if you want to put up a factory, you want some place where workers and management have easy access.    Land has become too expensive. Gurgaon and Noida began as industrial centres but now investments in  malls, office complexes and luxury apartments give better returns. we need to develop more industrial areas where land at reasonable rates is available for investments in setting up factories," he elaborated. 

Then, there is the major issue of transaction costs and time: permission to start a factory and operate it. Reducing this is still a work in progress, he said. 

"Unless you create large enough manufacturing zones with good quality infrastructure where land quality is guaranteed, where land allotment is done speedily  and where there is access to trained workforce who have nearby accomodation, you are unlikely to get investment in labour intensive industries," Shankar said. 

Jobs are moving out of China in labour intensive sectors where labour costs are rising -- that is in garments, in toys, in ship building and  in electronic components. These jobs can come to India if the ecosystem becomes attractive enough, he opined. 

"These are substantive issues which need more attention and action," said Shankar, a former secretary of then department of industrial policy and promotion.  

The government did announce some measures to woo investors to set up manufacturing facilities in the country.

The ministry of electronics and information technology had earlier this month moved forward with the production-linked incentive (PLI) scheme for mobile phone (and certain specified other) manufacturing companies. Sixteen companies were told that their plans for participation in the scheme were approved. The firms included some that make Apple’s iPhones on contract, such as Foxconn.

The idea behind the scheme is to woo these manufacturers to invest in India and increase production through incentive payments over the course of five years. The incentive rate will begin at six per cent and go down to four per cent over the life of the scheme. The government said it will cost about Rs 41,000 crore over the duration.

To a query whether the PLI scheme will work, Shankar said, "This is a good initiative. But at the end of the day investors seek good returns after evaluating costs and risks in India."

Investors will factor in these incentives while considering returns on investments. "The scheme will deliver the best results when there is progress on other factors that I have mentioned," he said. 

According to a note presented at a CII meeting, the government is working on a mechanism to start single-window clearance for fresh investments in manufacturing, likely to be launched in Q1FY22

To augment this facility, the government is likely to make a repository of the country's land bank accessible to prospective investors.

Around 20 states are expected to join this scheme for land banks, the note says.