ROLE OF MANUFACTURING INDUSTRIES IN INDIA FOR INCLUSIVE GROWTH

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1 97 ROLE OF MANUFACTURING INDUSTRIES IN INDIA FOR INCLUSIVE GROWTH DR. BIMAL ANJUM*; RAJESH TIWARI** *Professor & Head, Department of Management Studies, RIMT Mandi-Gobindgarh, Punjab, India. **Assistant Professor, Asia Pacific Institute of Information Technology SD India Faridpur Road, G T Road Karnal Side, Near Toll Plaza, Panipat, Haryana , India. ABSTRACT The article explores the role of labor reforms and manufacturing industries as a viable option for India to take the benefit of globalization for ensuring inclusive growth. The economic performance of India over the last one decade is phenomenal. After experiencing slow down in the worst global economic crisis, we are moving towards 9% GDP growth. But looking at the other side of the story, we have more absolutely poor people than 20 poorest countries of Africa. We have more people without electricity than the whole of Africa. This leads us to the apprehension that growth may not be inclusive enough. In economies like Japan, and China globalization has led to inclusive growth through labor intensive industries and creating a competitive business ecosystem of entrepreneurs, managers and workers then gradually moving up the value chain. India presents the unusual picture of appearing to skip the first phase of being globally competitive in simpler labor-intensive production. After the growth of China and subsequent rise in wage rates, countries like Vietnam, Cambodia, and Bangladesh are emerging as the new cheap labor destinations. India does not figure among these destinations. Outdated labor regulations, and inspector raj along with higher risk of labor unrest are the areas of concern. There is scope for merger of different reporting and inspection requirements, simplifying and rationalizing the regulatory burden for 'labor welfare' without diluting the real objectives of existing legislation. Certification through credible accredited third parties is an option that offers immense potential. Labor market flexibility offers the scope of leveraging the demographic dividend of India for ensuring inclusive growth. KEYWORDS: Labor market flexibility, Demographic Dividend, GDP. 1. INTRODUCTION Manufacturing contributes only 15% of Gross Domestic Product (GDP) in India, whereas in China it is 30%. The manufacturing potential of India does not represent its full potential. For a country like India with the largest young population in the world, poor status of manufacturing industry is a cause of concern. The share of employment in manufacturing in Malaysia is 50%, in Korea 62%, in China 31%. On the other hand, the share of employment in manufacturing in India is 13%.

2 98 2. NEED FOR MANUFACTURING ORIENTED ECONOMIC GROWTH In economies like Japan, and China globalization has led to inclusive growth through labor intensive industries and creating a competitive business ecosystem of entrepreneurs, managers and workers then gradually moving up the value chain. India presents the unusual picture of appearing to skip the first phase of being globally competitive in simpler labor-intensive production. After the growth of China and subsequent rise in wage rates, countries like Vietnam, Cambodia, and Bangladesh are emerging as the new cheap labor destinations. India does not figure among these destinations. 2.1 DEMOGRAPHIC ADVANTAGES Over the next decade between 2010 to 2020, according to UN projections, India will add 120 million people in the working age category. India will contribute 28% in the global increase in workforce. Whereas in the same period China will add 43 million people. Deputy Governor of Reserve Bank of India shows in his paper on People, Jobs and Productivity that demographic profile and rise in productivity resulting from switch over to industry is in the favor on India. As shown in chart 1, between 2020 and 2030 India will add 100 million people, whereas China will add 53 million people in the working age population. In India there is a great challenge of maintaining social and political stability in this period. The rising numbers of job seekers may create social imbalance if their expectations are not met. Labor intensive manufacturing offers the opportunity to tackle this potential threat. The changing demographic profile trend may drive the wages up in China, reducing the competitiveness of the manufacturing sector. The availability of abundant trained manpower in India may provide the opportunity for the MNC s to shift to India or expand to India. Thus there is both a population push factor and opportunity pull factor which justifies the focus on labor intensive manufacturing. Source: Reserve Bank of India

3 PRODUCTIVITY FACTOR Comparing the National Sample Survey of , and , we find that the share of total workforce employed in industry increased by just 1% in this period (Chart 2) CHART 2: SEGMENT WISE EMPLOYMENT TRANSITION In the same period the share of industry in GDP remained stagnant at 20%.

4 100 Using GDP per worker as the rough measure of productivity, we get the least productivity for agriculture, followed by industry and best for services. There is 4 times increase in productivity (Chart 4) if a worker shifts from agriculture to industry. In absence of efficient distribution, poor credit facilities, and infrastructure, the scope of increasing productivity in agriculture is doubtful. The gradual shift from agriculture to labor intensive manufacturing will lead to inclusive growth. Capital intensive GDP growth may lead to social unrest by widening the gap between the rich and the poor. The trend of Index of Industrial Production and Annual Survey of Industries over the period and shows the capital intensive nature of organized manufacturing industry. The real output increased by almost three times but the number of workers remained almost stagnant. Similarly the number of factories also remained stagnant as depicted in chart 5.

5 CLUSTER APPROACH To capitalize on the diverse population base clustering approach offers a good opportunity. Developing region specific clusters will not only reduce the congestion in industrially developed locations but may also lead to balanced and sustainable growth. Information technology offers the opportunity to manage diverse locations. The region specific economic potential may be nurtured to provide inclusive growth. 4. ROLE OF MSME S Micro, small, and medium enterprises (MSME s) contribute 17% in GDP of India, and are expected to contribute 22% by 2012 at an expected growth rate of 40%. Comparing the contribution of Gujarat and overall performance of India in table 1 we find a positive correlation between growth of industry component and GDP growth. The success story of Gujarat can be an important lesson for other states to improve focus on manufacturing sector to enhance economic growth. MSME sector not only has the potential to contribute to GDP, but also contribute to inclusive growth by increasing employment through adoption of labor intensive approach. Table 2 shows the growth in employment through MSME s. TABLE1: COMPARISON OF GUJARAT AND INDIAN INDUSTRIAL GROWTH Gujarat India GSDP/GDP growth[ to ](YOY) %contribution of industry in GSDP/GDP 36% 20% Industrial Growth 10.79% 9.29% Growth in Bank credit to MSME s(fy2010) 34% 20.5% Source: Investor Felicitation Portal: Government of Gujarat MSME sector not only has the potential to contribute to GDP, but also contribute to inclusive growth by increasing employment through adoption of labor intensive approach. Table 2 shows the growth in employment through MSME s.

6 102 TABLE 2: EMPLOYMENT GROWTH FROM MSME S IN GUJARAT Period No. of New Units Registered Investment(Rs. Crore) Employment Apr-2007 to Mar 2008 Apr-2008 to Mar ,166 8, ,772 17,803 8, ,257 Apr-2009 to Sep ,549 3, ,472 Total 39,518 20, ,501 Source: Investor Felicitation Portal: Government of Gujarat 5. LABOR MARKET REFORMS Job security regulations of workers puts a lot of pressure on the industry in the organized sector. China did away with job security regulations for new workers and new establishments in early 1990 s. This led to the growth of manufacturing sector outside the special economic zones. France also recently implemented its First Jobs Contract Law. The law allows the employers to hire new workers under flexible conditions. The reforms in outdated laws are long overdue. To propel the next stage of growth there is an urgent need to make the labor markets flexible. Doing away with job security regulations justifies the creation of social security net. An appropriate social security system can be set up by pooling resources from industry, employees, and government. 6. TRAINING NEEDS The availability of labor can be exploited as an opportunity only if the workforce is equipped with the skills necessary for the modern technology. The existing infrastructure may not be enough to meet the training needs of the population. A Public Private Partnership model may be a viable option. There is a need for industry and NGO s, and educational institutions to play a socially responsible role in this regard. 7. REVIEW OF THE PROPOSED NATIONAL MANUFACTURING POLICY For creating better employment opportunities in the manufacturing sector, and to ensure sustainability of growth in India, Department of Industrial Policy and Promotion, Ministry of Commerce is planning to launch a National Manufacturing Policy. The policy proposes to launch National Manufacturing and Investment Zones (NMIZ s). The policy has set the target to increase the sectoral share of manufacturing to 25% of GDP by The policy targets to double the employment level in this sector. Formation of special purpose

7 103 vehicle for ensuring speedy clearances is a step in right direction. The NMIZ s will provide business friendly policies, approval ecosystem and physical infrastructure. The central government will provide the logistical connectivity through rail, road, airport, and telecom connectivity. The proposal to convince the state governments to waive off all municipal and local taxes for 10 years may face political problems. 7.1 GREEN TECHNOLOGY India has an opportunity to use green technology, by providing adequate incentives and policy support to encourage green operations in the proposed NMIZ s. Increasing consumer preference for green products can also influence the market dynamics. Globally the market for green products is estimated at $190 billion and is growing at 15% year on year. India has a natural advantage in terms of solar energy. The solar irradiance of 220KWh/M2 is higher than the average solar irradiance of the developed world. The solar energy market is expected to grow at a rate of 9% per annum till TAX INCENTIVES The processing area under the NMIZ s will include one or more Special Economic Zones. The tax benefits available under the relevant policy to the SEZ s will continue to be applicable for NMIZ s also. Exemption from service tax, central sales tax and income tax exemption under section 10 AA will be applicable. Subvention of interest on working capital by 4% to improve global competitiveness. 7.3 SKILL DEVELOPMENT One of the major areas of concern for manufacturing industry is lack of employable skills in the workforce. Industry reports show that about 50% of the technical pass outs lack employable skills. To reap the benefits of demographic dividend, it is essential to improve skills of the working age group. Formation of National skill Development Corporation is a right step in this regard. NMIZ s would also run training courses to develop basic and specialized skills to match the needs of the industries in the NMIZ s. 7.4 LABOUR REGULATIONS The flexible labor regulations will provide the incentive for domestic and MNC companies to come to NMIZ s. The Contract Labor Abolition Act will not be applicable. Flexibility in terms of downsizing, no. of hours per shift, temporary status of employees will meet the expectations of the industry to improve global competitiveness. Provision of allowing women in three shifts will boost the female participation in the workforce. Restriction to join union for employees of a prescribed limit of salary will create working environment free from labor unrest. The policy also does a balancing act by providing a social security net for the employees. The SPV will monitor the social security scheme. Job loss policy for employees and a sinking fund monitored by the SPV will ensure that the labor dues are paid on time in case of closure of a unit.

8 CHALLENGES In absolute terms India is one of the largest carbon emitters in the world. The growth in manufacturing sector will increase carbon emission. CONCLUSION Economic growth after the liberalization has focused primarily on capital intensive industry, and services. However to ensure inclusive growth we cannot ignore labor intensive manufacturing. Demographic profile of India and productivity gains from manufacturing sector further creates the need to improve the contribution of industry in the GDP. The proposed National Manufacturing Policy is a right step in this regard. The much awaited labor reforms need to be introduced not just for the NMIZ s but for other sectors as well to improve the global competitiveness of the Indian manufacturing sector. Improve quality of workforce through higher education, core competencies, more relevant technical skills, health and nutrition to match domestic as well as global demands of labor market. Creating a vibrant MSME sector by developing supportive policy and regulatory environments including easy access to credit. Introducing reforms in the labor market, to make it flexible and increase competitiveness of the industry globally. Flexible labor markets with an appropriate social security system may lead to inclusive and sustainable growth. REFERENCES Department of Industrial Policy and Promotion, National Manufacturing Policy: A Discussion Paper, available at [Accessed 16/02/2011] Financial Express, 2010, Manufacturing failed to contribute to Inclusive Growth available at [Accessed 15/2/2011] Gokarn Subir, 2010, People, Jobs and Productivity: The Simple Dynamics of Inclusive Growth, Keynote address at CII Western Region s Annual Regional Meeting and National Conference on Achieving Double Digit Growth, available at [Accessed 16/2/2010] Investor Felicitation Portal, 2011, Micro, Small, and Medium Enterprises: Key to Gujarat s Inclusive Growth available at Rahman Habibur, Younus Sayera, and Hossain Sakhawat, 2009, Recent Employment Situation and Labor Market Developments in Bangladesh, The Global Journal of Finance and Economics, Vol.6, No.2, 2009, pp