Making India a Manufacturing Hub: The Challenges

By Aditi Khanna

Edited by, Anandita Malhotra, Senior Editor, The Indian Economist

The manufacturing sector in India has long been regarded as a laggard, inspite of the founding fathers of the Indian planning process having given it much thought and tried their best to propel the growth of basic industries in India by using tools like trade barriers and promoting import substitution. Even after 67 years of independence from British rule, manufacturing still constitutes only 15% of the total GDP of the country, and contributes roughly 2% to world’s manufacturing output. China on the other hand, is way ahead.

With the advent of the new government at the Centre, manufacturing has recently got a much needed official push, at a time that seems ripe for India to take the place of the many perceived low-cost manufacturing locations that are losing their sheen. A recent BCG report indicates that the estimated cost advantage that Chinese producers witnessed in the past as compared to their American counterparts has come down to less than 5% between 2004 and 2014, and countries like brazil have actually turned out to be costlier destinations than USA (23% costlier) because of its higher wages and very poor productivity growth. India meanwhile has roughly maintained its productivity advantage over the developed world, having increased its manufacturing productivity by more than 50%. Even as manufacturing wages have doubled in India in the past decade, the rise in productivity and continuous currency devaluation (close to 26% in the last 10 years) has more than offset the fall.

Thus the urgent need of the hour is for India to capitalize on this huge opportunity, not just to participate in the immense job creation exercise that the Indian economy has got to undertake to account for the 8-9 million additional people entering the workforce annually, but also to correct the huge trade deficit that the economy currently bears the burden of. In order to achieve the aim of becoming a manufacturing hub, the following challenges need to be tackled efficiently and in a time bound manner by the center-state administrations:

1. Policy Impediments: Ease of Doing Business in India

There has been insufficient impetus given by the government on creating a manufacturing friendly environment to promote domestic producers, even as it has been liberal in doling out sops to assorted high volume players, many of them international. India still ranks 132 (in 185 countries) on the Ease of Doing Business Rankings. With ranks of 182 and 184 respectively, India is currently perceived to be a very tough place to get a construction permit or enforce a contract. All of this tremendously increases the cost, time and unnecessary energy spent in establishing a manufacturing business or running it smoothly. While efforts have been made in the recent past to correct the red-tape-ism that has become the symbol of getting any kind of business clearances in India, and bringing in transparency and swiftness, a lot still needs to be done to improve the investor sentiment towards India. Further, the advent of pan India reforms like the introduction of the GST is eagerly awaited by industrialist, as will drastically streamline the tax incidences in different states, thereby creating some sort of cost standardization for the entire country.

2. Labour Laws

Many experts recognize this as the single biggest impediment. India currently has close to 47 central and over 200 state-specific laws that govern the hiring-firing and working conditions of industrial labour-force, making it among the strongest labour laws in the world. There is a dire need for these to be rationalized, as there are frequent reports of their misuse by the labour-unions; which adversely affects the productivity and quality of production.

3. Infrastructure and Power

The condition of roads, ports and power systems in India is far below the desirable values. Businesses frequently have to make provisions for either captive power generation mechanisms or backup power sources, both of which add tons to their cap-ex expenditures. Bad quality roads and ports make transportation both slow and expensive, and hugely limit the accessibility of otherwise profitable manufacturing locations.

4. Skill-set of Domestic Labour

There is also a latent but powerful need for the skill-set upgradation of not just the shop-floor workers but also the managing staff of Indian manufacturing units. To solve this problem and undertake targeted skill development of the workforce, an initiative by manufacturing companies themselves in conduction targeted skill-development programmes for new hires, or collaborating with engineering schools will go a long way. The government is also focusing on vocational studies and skill-development of rural youth in particular, and this is a good step going forward.

5. Incentive to MSMEs

MSMEs have always played a major part in India’s industrial sector. As of today, the sector accounts for 45 per cent of the manufacturing output. It is also a huge employment generator. This sector needs to be given appropriate incentives, like tax breaks etc.

All in all, it’s a great time for India to burst at the world manufacturing scene, and seize the glory that is rightfully hers, as all these measures are practically feasible and would go a long way in making India a global manufacturing hub.

Aditi Khanna is presently pursuing her Post-Graduate diploma in Business Management from XLRI Jamshedpur. She has completed her graduation in Economics (Hons.) from Lady Shri Ram College, Delhi University, where she was a part of the department editorial board. She is an avid reader of anything interesting that catches her eye. Economics stimulates her and baking soothes her. She doesn’t shy away from putting the occasional poetic twist to her words when her restless mind wanders. And when not found anywhere, she must be window-shopping online!