By Divyat Rungta
Edited by Nandita Singh, Senior Editor, The Indian Economist
The manufacturing sector is in every sense the backbone of an economy. A sound manufacturing sector can boost productivity of the primary sector and can invariably lead to growth in the tertiary sector. It also plays a vital role in ensuring that the economy is insulated from shocks in the world market by stabilizing and securing domestic production.
Being a resource rich nation, it is hard to understand why Indias exports remain at just 110% as compared to non-oil imports. Cumulative value of exports for the period April-August 2014-15 was US $ 134798.12 million as compared to non-oil imports valued at US $ 122969.9 million for the same period. Exporting raw materials to China and importing finished goods has been the trend, with China exporting to India almost four times of what it imports. Indias trade with China has the largest deficit, about $31 billion in 2013.
For long, China has been the global manufacturing hub with cheap labour and sound infrastructure. However, quite evidently, China has been losing the sheen that once attracted MNCs. Labour costs in certain sectors are seeing nearly 15% increases, with average rates touching 300$/month. There are two reasons for the same. One, the one child policy implemented by the government in 1970 has led to an aging work force. Second, the rising aspirations of the Chinese youth are leading them to higher studies instead of entering the labour market. This is evident from the fact that Chinas working age population fell by 2.44 million to 919.54 million in 2013, marking the second consecutive year of decline. This double whammy has lead to decreasing supply of labour and consequently a push in labour prices. Furthermore, in the past three years, the Yuan has climbed 7.2 per cent against the US dollar, making China’s exports costlier. The rupee, meanwhile, has dropped 26.7 per cent in the past three years, making exports cheaper.
Seeing this opportunity, Narendra Modi has not just hit the right note, but has made a bang by glamorizing Make in India from atop the Red Fort. With the level of domestic and foreign media coverage received for this campaign, Indias manufacturing sector can see a real boom.
However, India cannot afford to simply rely on Chinas decline. There are some key issues to be addressed before the ball can be set rolling:
The problem of low labor productivity must be improved by a two-pronged approach.
First, there is a drastic need for development and investment in infrastructure, primarily electricity and transport connectivity. Not only does poor infrastructure reduce working hours and bring in inefficiencies, but also restricts locations of industries. The government must look to relax norms and make business environment conducive for private players to invest in industrial zones, while taking responsibility for electricity and road connectivity. A key element will be to avoid the trade off of the environment at the expense of development. Improper waste treatment and reckless rehabilitation of local communities can only worsen situations in these industrial zones.
Secondly, the human workforce needs a major overhaul from a knowledge based to an innovation based approach. There needs to be significant investment in the education sector, which is in dire need of skill-based teaching. The government can perhaps look to have certified vocational training programs for students who have passed class 12. This can particularly work well to motivate low income families to ensure complete higher education for their child. Germany is a prime example of improving labour productivity through vocational training systems.
Fortunately, India is yet to reach a point where the relative hypothesis can emerge. The hypothesis states that increased productivity will lead to lower prices, and thus, a growth in demand. However, if the output growth does not outweigh the growth in productivity, there can be a fall in employment. India is a far shot away from that, and increased labour productivity is only going to create jobs.
The second major issue is to promote and instigate research and development in the sector. The manufacturing sector offers immense scope of research and development, but unfortunately this has been a far cry. As a result, students shift base abroad, where a majority of the benefits are reaped in local economies. There is a need to step up from the usual government supports and private players build model. A distinct requirement is to encourage technology platforms in industries, which should be used as a basis for developing products, with risk sharing and cooperation from the government. Efforts will also have to be put in at the college level to encourage ideating and implementation. With the government looking to increase number of IITs and IIMs, it is the right time to focus on R and D.
Third, it is also important to realize the indirect impact of MNCs setting up their plants in India. This will serve as a major boost to ancillary industries like transportation, housing, food, and housekeeping. Thus, the government should encourage development in the vicinity under the CSRs of MNCs, while simultaneously attempting to ease the tax rates for a certain time period.
Apart from these, India needs a major ramping up of its labour laws, easier land acquisitions and faster clearances. The infamous red-tapism of the Indian business environment must also be done away with, towards which efforts are already being made.
A lot of these issues, which have long been seen as bottlenecks, had to do with the attitude of the top government we had for a decade. The chalta hai attitude reflected poorly on the people. With the Modi government at the helm, and rupee at a favorable rate for exports, it is reasonable to be optimistic and expect a forward push in the manufacturing sectors contribution to GDP from 15% to 25% within a few years. Its time India rolls out the red carpet, and welcomes prosperity soon.
Divyat Rungta is currently a second year student pursuing B.A Economic (Hons) in Shri Ram College of Commerce. He is a die-hard sports lover and enjoys listening to Indie music. He has been deeply influenced by his parents, teachers, and the Indian Army! As a member of Enactus SRCC, he spends a lot of time working on social entrepreneurship projects undertaken by the team. Having the opportunity to interact with various communities and give them a sustainable livelihood has made a huge impact in his personal life. He strongly believes the student community has the responsibility of shaping a new India, and wants to make a significant contribution to it.