COMPETITIVENESS OF MANUFACTURING SECTOR

Transcription

1 COMPETITIVENESS OF MANUFACTURING SECTOR IMC- Economic Research & Training Foundation

2 COMPETITIVENESS OF MANUFACTURING SECTOR Jamshetji Tata the great Indian visionary was first of his kind to introduce the idea of manufacturing in India. He set up the first Indian manufacturing base and started the manufacturing age of India. A country which was not known to produce even a needle went ahead to manufacture and design space shuttle equipment indigenously. However, today when it is brooded that the Indian manufacturing sector is contributing only 16% of the GDP with India s share in global manufacturing at only 1.8 %, there lie many lacunae to increasing productivity through efficient labor and efficient supply and logistics management. If India s manufacturing sector realized its full potential, it could generate 25 to 30 % of GDP by 2025, thus propelling the country into the manufacturing big league, along with China, Germany, Japan, and the United States. It is estimated that India could create 60 million to 90 million new manufacturing jobs and become an attractive investment destination for its own entrepreneurs and multinational companies thus lowering the unemployment rate which today stands at 12%. In order to realize this dream India s product makers must embrace global best practices in operations while tailoring them to India s unique environment to improve the efficiency and effectiveness of the country s manufacturing investments. Factors Contributing to Sluggish Growth One of the factors contributing to sluggishness in the Indian manufacturing scenario is 1. India s legacy of industrial protectionism which has left many of the country s manufacturers uncompetitive. 2. The Indian manufacturer s lag behind their global peers in production planning, supply chain management, quality, and maintenance areas that contribute to their lower productivity. Consequently, workers in India s manufacturing sector are almost four to five times less productive, on an average, than their counterparts in Thailand and China, respectively. 3. The glaring failure to develop power and transportation infrastructure commensurate with the needs of the economy and the absence of an industrial policy, an idea that Indian economists and policymakers threw out of the window when they dismantled the stifling controls of DGTD. 4. Falling rupee is also adversely affecting the export competitiveness of businesses by aiding cost push inflation and liquidity crunch due to rising inflation. Deficit in current account is also a contributory factor to the sluggish growth of the manufacturing sector as compared to the robust services sector. 2

3 Socio-Political Consequences 1. It is estimated that 8 to 9 million additional youth will join the Indian labor force annually, between 2012 and A large burden of this job creation will fall on the manufacturing sector which has so far been a laggard. Failure to create the jobs required will have serious socio-political consequences. The National Manufacturing Policy which was introduced in 2011 is a belated departure from the policy neglect of earlier years. It must address the challenges of rapid job creation and expansion of domestic production. It has ambitious goals to create 100 million additional jobs in manufacturing by 2025 by accelerating the growth of manufacturing to exceed the overall growth of the economy by an additional 2 to 4 % annually. Thereby the share of manufacturing in the overall growth of the economy will also increase from 16 %, where it has been stagnant, to 25 %. Two points must be made here while mentioning these goals. The first is that the summation of the bottom up plans made by the producers and policymakers associated with the various manufacturing sectors results in the same numbers. Therefore there is an underlying consistency in the goals and so they can be achieved. The second point is that these plans were made when the forecast of growth of the economy was 8 % in the 12th Plan. There was a faster growth thereafter. The 2 to 4 % growth is over and above the base level growth. If the base falls due to other macroeconomic problems and policy log-jams, which has happened, the growth of the manufacturing sector will be lower and it will not meet its employment targets. However the need to create jobs will not reduce. Young people will continue to pour out of schools and colleges and many with better skills too. They will be very frustrated if they do not get jobs and large scale social unset could result. 2. Growth of the manufacturing sector is also critical for ensuring that India s trade balance is corrected. The country has been happily importing large volumes of manufactured goods as its economy has grown but it has not been able to develop a large, competitive manufacturing base to dampen the need for imports and to spur export. 3

4 Sub-sectors that stand out in India s manufacturing sector are as follows: MANUFACTURING Basic goods Electricity Coal Finished Steel Fertilisers Cement Steel casting Pipes and tubes (other than spun) Stamping and forging Sulphuric acid Caustic soda Heavy structural Aluminium ingots Copper (cathode) Intermediate goods Cotton yarn Petroleum refinery products Jute and mesta textiles Giant tyres Tin metal containers Bolts and nuts Plywood commercial Paints, enamel and varnishes Capital goods Commercial vehicles Auto components Electric motors Railway locomotives Textile machinery Electric generators Machine tools Ship building and repairing Complete tractors Diesel engines Wagons Motor starters and contractors Broad gauge passenger carriers Boilers Consumer goods Paper and paper boards Cotton cloth Sugar Among sub-sectors in manufacturing, the top five are food products, basic metals, rubber and petrochemicals, chemicals, and electrical machinery. Together they account for over 66.0 % of total revenues in manufacturing. However, these verticals rely primarily on domestic demand for a major part of their revenues. Tea Wheat flour/maida Tetracycline Artificial leather cloth Cigarettes Beer Vanaspati/edible hydrogenated oil Penicillin Soaps Phone instrument Wristwatches 4

5 The above table depicts that Manufacturing holds a key position in the Indian economy, accounting for nearly 16 % of real GDP in FY12 and employing about 12.0 % of India s labour force. Growth in the sector has been matching the strong pace in overall GDP growth over the past few years. For example, while real GDP expanded at a CAGR of 8.4 % over FY05-FY12, growth in the manufacturing sector was marginally higher at around 8.5 % over the same period. Consequently, its share in the economy has marginally increased during this time to 15.4 % from 15.3 %. Growth however has remained below that of services, an issue that has not escaped the attention of policy makers in the country. Manufacturing Exporters Indias manufacturing exporters have played a key role in promoting the sectors prowess to consumers across the world. While on one hand sectors such as textiles, and gems and jewellery have been India s brand ambassadors in global markets since ancient times, the country has also made its presence felt in key industries such as engineering goods and chemicals. In fact, analysis of India s export data for FY11 reveals that engineering goods had the highest share in manufacturing exports (40.4 %), followed by gems and jewellery (25.2 %) and chemicals and related products (17.2 %). Overall, total manufacturing exports in FY11 grew to USD168.0 billion from USD billion in FY10. The sector s exports grew at a CAGR of 19.6% during FY

6 Within manufacturing exports, engineering goods was one of the fastest growing as shown in the diagram. The segment recorded a CAGR of 26.0 % during the period FY01-FY11. Other subsectors with high growth rates include gems and jewellery and chemicals, which grew at a rate of 18.6 % and 17.3 % respectively. Within engineering goods, transport equipment led the field with a CAGR of 34 % (FY01-FY10), followed by electronic goods (24 %) and machinery and instruments (22 %). In the chemicals sub-sector, growth in exports was primarily led by pharmaceuticals exports rose 18.0 % during the stated period. New Manufacturing Policy puts thrust on the following: 1. Improve the business regulatory environment, principally in the States. 2. Focus on the quality of clusters in which MSMEs the backbone of the manufacturing industry operate, as they are difficult to service individually and do not have sufficient clout in policy circles. 3. Improve the development and utilisation of India s demographic assets. Human beings must be treated as the core asset of our manufacturing enterprises and not as a problem to be avoided. No doubt we need a change in our labor laws. What the changes should be must be determined by a consultative process amongst the stakeholders. Moreover without a consensus it will be politically impossible to change the laws. 4. Create the right set of policies to improve technology and increase value addition within the country, thus enabling reduction of imports and increase in exports and employment. The HSBC India Manufacturing Purchasing Managers' Index (PMI) - a measure of factory production - stood at 48.5 in August Manufacturing: Key Developments and Investments - The Indian rubber industry has been invited by Vietnam to invest in their dynamic rubber sector. The South-East Asian nation intends to give a major boost to its rubber 6

7 segment and has targeted to produce 1.2 million tonnes of rubber. Currently Vietnam consumes only 15% of the more than 9 lakh tonnes of rubber produced in the country and aims to increase this domestic consumption to 4%. Vietnam seeks Indian investments in this regard that would not only help scale up rubber manufacturing there, but will also strengthen bi-lateral business ties. - Kerala-based centrifuge latex producing firm St. Mary's Rubber Pvt. Ltd. - has established India s largest glove manufacturing unit to tap the surging demand of examination and surgical gloves. The new facility, to be fully operational within a couple of years, will produce 500 million pairs of gloves per annum. The total project cost has been estimated at Rs 150 crore (US$ million) as of now. Indian surgical glove market is growing at 15% while the demand for examination gloves has been rising by 20%per annum. St Mary s is the largest supplier of centrifugal latex under the brand Cenex, a crucial raw material for manufacturing rubber dipped goods like gloves, balloons, condoms and rubber bands. - Mondelçz International s Cadbury India, is planning to infuse over Rs 1,000 crore (US$ million) in the first phase of a manufacturing plant in Sri City, Andhra Pradesh. The project, to be developed under four phases, is planned for final completion by The multi-category food facility will be the largest chocolate manufacturing plant in India and once completed, it is likely to become a benchmark in production efficiency, energy saving, emission reduction and community involvement. - Direct marketing company Amway India has initiated work on its manufacturing facility at Nilakottai, near Madurai. The proposed plant, to be Amway s first owned facility, is scheduled to be completed by mid Amway is infusing its first major outlay of Rs 400 crore (US$ million) in this plant, which will have nine production lines for nutrition, cosmetic and oral-care products. Manufacturing: Key Developments and Investments: Government Initiatives In order to boost domestic manufacturing, a proposal has been approved 1. To make small civilian passenger aircraft indigenously. The plan envisages an increase in steel production capacity to 300 million tonnes, a 30 % increase in textile exports, and domestic manufacturing capabilities in advanced materials, alloys and composites. 2. The State Industries Promotion Corporation of Tamil Nadu (SIPCOT) and the Tamil Nadu Industrial Development Corporation (TIDCO) will be forming a joint-venture (JV) to setup an industrial park for high-end plastic components manufacturing units in Chennai. 3. The total project cost is estimated to be around Rs 243 crore (US$ 38.2 million) and Tidco is seeking Rs 40 crore (US$ 6.29 million) grant from the Department of Chemicals and Petrochemicals, Government of India. 7

8 4. In a bid to encourage growth of the electronics manufacturing sector and curb dependence on imported components, the Government has recently approved three projects worth Rs 200 crore (US$ million) under the Electronic Manufacturing Clusters (EMC) scheme. 5. Tax benefits and relief in other logistics by the GOI in the SME sector. Conclusion Road Ahead 1. The SME sector as a part of the larger Manufacturing sector The small-scale industries sector plays a vital role in the growth of the country. It contributes almost 40% of the gross industrial value added in the Indian economy. It has been estimated that a million Rs. of investment in fixed assets in the small scale sector produces 4.62 million worth of goods or services with an approximate value addition of ten %age points. The small-scale sector has grown rapidly over the years. The growth rates during the various plan periods have been very impressive. The number of small-scale units has increased from an estimated 0.87 million units in the year to over 3 million in the year When the performance of this sector is viewed against the growth in the manufacturing and the industry sector as a whole, it instills confidence in the resilience of the small-scale sector. Year Target Achievement * * * (P) * 8.90 P-Projected (April-December) * Target not fixed at constant prices 8

9 2. The Mckinsey Report McKinsey & Company believes that Indian manufacturers have started operating at par with their international counterparts. The country s increasing manufacturing exports, coupled with economic expansion (at almost 7 % per annum) gives a golden chance to Indian manufacturers to demonstrate their mettle. The sector is well positioned to derive benefits from favourable demographics, supportive Government policies, availability of cost-effective labour and rising income levels. It is estimated that rising domestic demand in India, along with the multinationals desire to enhance their footprint in the sub-continent, could boost the country s manufacturing sector to grow six-fold by 2025, to US$ 1 trillion, while creating up to 90 million domestic jobs. Also, owing to availability of massive and relatively well trained workforce, a robust supply base, and access to natural resources needed in production (such as iron ore and aluminium for engineered goods, cotton for textiles, and coal for power generation), India is definitely poised to become a viable manufacturing alternative to China across many sectors. Not only that, if our resources are efficiently utilised, India might even dominate some skill-intensive manufacturing sectors in the years to come. 9