Solutions for reviving India’s manufacturing sector lie in undoing government policies
PS Deodhar 21 February 2013

The biggest albatross around India’s neck, preventing its healthy manufacturing growth in the face of the globalization threat is the lack of efficient infrastructure. Lack of ability to face global competition and our failure to create the necessary infrastructure on the other, is indeed a deadly cocktail

The recently declared intent of the Government of India to focus on strengthening of the manufacturing sector in the country is a belated but welcome move. No other sector will create much-needed employment opportunities for the millions of our semi-skilled and unskilled compatriots as the manufacturing sector and agriculture. Construction and infrastructure will also create jobs but they are temporary, away from homes and often hazardous. None other work opportunity will also trigger innovative urge and challenge to creativity for our young as in manufacturing. While the government will have its own ideas on how to go about creating a vibrant manufacturing sector, the authorities should at first address all the current difficulties faced by this sector within a comprehensively planned schedule to enable us to reach the desired goal. Majority of them should be addressed first before planning more SEZs and industrial zones.

After 55 years of experience in manufacturing industry, I would like to venture to suggest some concrete steps necessary to reach that goal. However before I do so, it will be appropriate to recount why this sector is in trouble. Let us look at what is ailing this sector. This review will help in providing us some concrete clues to revive manufacturing in our country and enable it to get strong enough again to export and create large employment for the semi-skilled and unskilled labour. Indeed embedded in this review will be the solution to the current problem.  


Reasons for the decline in manufacturing—lack of quality culture and uncompetitive prices

Ever since 1991, when India became liberal and joined the WTO (World Trade Organisation), imports got progressively liberalized and import duties dropped sharply. This could have been good for India if our manufacturing exports were already of a reasonable volume. But long years of protection, skewed and complex tax structure, poor logistic support and lack of quality culture had made our industry weak and uncompetitive. We had very few export-worthy products both in terms of quality and price. By then Taiwan and South Korea had efficient export-driven manufacturing in place. China too had joined in by late 90s becoming the lowest cost source with quality of its products meeting the standards set by the western countries. Proactive Chinese policies had a big role in this. It supported the industry development with huge investment in efficient logistic support as well as first rate infrastructure. SME (small and medium enterprise) sector in China got low-cost space, subsidized electrical power, simple one point tax regime (GST) and product specific industrial clusters. All this enabled the Chinese industry to offer unbeatable product prices that amaze the world even today.

Read Commercial globalisation: The mother of all modern day ills

Intrinsically weak Indian manufacturing industry suffered since the protection from foreign competition they were given through import ban and high tariff suddenly vanished. It also did not get any support from our government comparable to what the Chinese industry received. In fact it continued to suffer at the hands of militant trade unions, complex multiple tax regimes and its corrupt and oppressive enforcement. China, and now Thailand and Vietnam, have just overwhelmed India as a global supplier of the manufactured goods.{break}

Indian industry got the further blow when it also lost a big portion of the domestic market progressively to China. Most of the reputed Indian brands in consumer sector not only stopped manufacturing but also stopped outsourcing products from the local companies. Indian traders are flocking China to import cheap products of everyday use. They are importing container loads of toys, sundry household goods and even the brooms from China! Solution to this is not banning Chinese imports but doing what China does; cleverly subsidise our manufacturing and make that activity free from bureaucratic interventions.

Big businesses loved import liberalization. Most now get all their products like consumer durables, appliances, furniture, building construction materials and fitments etc from China and other East Asian countries under their private labels. There was no incentive for them to either set up a manufacturing unit or outsource from local small and medium sector enterprises.

For the last 20 years IT, telecom and consumer electronics sectors have been growing at a tremendous pace in India; volumes doubling in some areas. Unfortunately, however, almost nothing used or sold in these hi-tech sectors is made in India. Some efforts were made by enterprising business houses to produce in India but they found costs to be too high, logistics support non-existent and poor productivity due to labour activism. They find efficiency in material management unacceptable and causing delays due to bureaucratic apathy. Corrupt local officials further add to problems. Importing from East Asia assured businesses acceptable quality and timely deliveries. For instance, the Indian telecom business is today the third largest in the world with over $60 billion in revenues, but in 2011-12 locally manufactured hardware has been less than $900 million! Even in this, the local value addition was just 30%. As a result the Indian industry has been dying a slow and painful death with the exception of pharmaceutical, automobile parts, manufacturing and a few other product lines.

In any case, the inability of our industry to compete with its foreign counterparts was predictable since we could not manufacture high-quality products locally and sell them at competitive prices. The protected manufacturing monopolies by large business houses in the past had allowed them to sell their carelessly produced, poor quality products to hapless Indian consumers, who had no alternative, but to put up with whatever they could. This protection from foreign competition and the license-permit raj had another deadly consequence—it turned the Indian manufacturing sector lackadaisical about its product quality and customer care. Consumers had to wait for years to buy vehicles and other durables. Militant trade unions only have been helping the matter to worsen further. Such an industry had no future in post-liberalization period. Consumers indeed were vengefully happy! Most Indian business houses with recognized Indian brands and distribution network have all quickly shifted their sourcing to East Asian countries, mainly China.{break}  


Only focussing on service sector and ignoring manufacturing sector has had a high price

We cannot afford to ignore manufacturing and chase only the services sector like a developed nation. Manufacturing is akin to agriculture in a sense that both these sectors add some real value and create wealth for the industry and jobs for those who add it. A farmer, using the natural elements, produces grains and farm produce, which create some real and ‘new’ wealth. His labour then gets a value as he ‘processes’ seeds into a valuable produce of grains, fruits and vegetables. Similarly, product manufacturing uses raw materials and turns them, with human efforts and intelligence, into useful products that have much higher value than the raw material.

A kilo of steel worth Rs40 is turned into a machine part worth Rs200 to Rs1000 a kilo, and this added value is largely due to human innovation and efforts. So these two sectors of the economy create some real ‘new’ wealth using human efforts in formulating concept, innovation, design, and executing them using the services skilled and unskilled labour. This value has a price that a consumer finds worth paying for. Manufacturing, like agriculture, creates work for people with a wide range of skills, education and training. It also generates work for totally unskilled and intellectually handicapped persons. Trading and services however, do not add as much value and do not create as many jobs as in the manufacturing sector, especially for unskilled and uneducated people. Indeed, this should motivate any nation with a large poor and educationally handicapped population such as India, to support and make manufacturing and agriculture production grow at rate at least as high in percentile terms as our economic growth. Unfortunately the government has done little to encourage both these sectors with policies that have been effective on ground. I am glad that it is now awaken about this need. If a nation wants ‘inclusive’ economic growth as is now realized by our leaders, we cannot do it without encouraging and supporting domestic value creation by investing in good infrastructure and other inputs that these two sectors need. China, with its focussed governance, has been doing it and with such concrete results!

Benefits of focusing on these sectors can be clearly seen in all the prosperous Asians tigers, and now, in China too. Initially, all these countries had nothing to offer other than cheap labour and some unprocessed raw materials. They allowed foreign companies to set up 100% foreign-owned factories on their land. This immediately created jobs in manufacturing for the local people. Over a period of time, the local people learnt the ropes and got technologies and process knowledge from the developed world; free of cost!

During the decade of 1995 to 2005, China created 250 million new factory jobs for its people, while in our country, as per the RBI (Reserve Bank of India) report, there was a net decline in factory jobs. Today, China's SMEs are formidable in the field of industrial processing, accounting for over 85% in industrial employment. They produce products of a quality acceptable to Germany and Japan. In India, we often see bad quality Chinese products, but this is because our traders import cheap products, without giving a second thought to quality.

In early years after 1991, no one in the country has had any sympathies for the industry. Complaints by the industry about not having a level playing field are falling on deaf ears. It had no spokesman and no one listened to its defence. The so-called Bombay Club was silenced almost immediately. Even today the common man has no kind words for Indian-made goods. For over a decade now consumers have become the kings. Smiling and hospitable salesgirls are delivering a large variety of beautifully packaged, high quality imported consumer goods to them. The days of arrogant distributors of Fiats and Ambassadors, ill-treating the consumers are a thing of the past.

While the protected industry only got what it deserved, the real architect of the pathetic state of the industry was the license-permit raj, the devil created by the bureaucracy at the Centre. But it has managed to escape any blame. I was lucky to get Ms Indira Gandhi’s attention to this aspect in the consumer electronics sector in early 80s and ultimately, got that sector de-licensed. Rajiv did little to add to it, except in software. It is interesting to note that today, the IT sector, at least in services, has managed very well and created a new class of young rich that has helped fast economic growth due to increased consumption.

The manufacturing industry capable of serving global demand is, however, completely different from what we have. The conditions and attitudes are entirely different. It may sound strange, but our industrial environment and inadequacies in infrastructure are such that one simply cannot think of efficient operation of a manufacturing enterprise in our country.{break}


Let's put the past behind and focus on growth of manufacturing and its quality

While all the complaints against the Indian manufacturing industry may be true, the fact remains that we, as a nation, cannot survive if major share of indigenous consumer needs are not met with the local industrial output. We must keep in mind that value addition in manufacturing creates real wealth, whereas in trading one just shifts money from consumers to traders. The value addition in manufacturing strengthens national economy, and every country needs such wealth creation through domestic and export sales of manufactured goods.

Let me make it clear that the key initiatives are still with the government at the Centre and the states and their bureaucracies. Unless these institutions hasten the reform process; unless simplified monitoring regimes are put in place and the complex tax system is done away with; there is little chance for our industries to compete and survive. We are pitted against China and other countries, which have a disciplined work force, low cost labour, a healthy functional environment and an efficient relevant infrastructure for transport, communication and power.


Strong manufacturing will enable us to attract talent

In India, investments in product development have been limited to medium and some small industries started by technologists. Big businesses spend little on research and product development. Our IT services companies are super rich but India owns no IT product since Infosys, TCS and others do not invest in research and product development. Those in the IT hardware field today put their label on Chinese merchandise. The technologist-owned enterprises, however, were misfits in the current systemic monster. The current situation throttled their growth. These few industries however created the real backbone of manufacturing and made India at least self-reliant in several fields. They did import substitution. They created new products. But they realized that merit alone would be not enough unless industrial policy supported innovation and creativity and that did not happen.

I have experienced that technology enterprises cannot succeed unless they indulge in fraudulent compromises with ground realities. We know that those who compromised integrity did have shown spectacular growth. A combination of enterprise and fraud works well in India. Those who did that have become role models for our young. I also feel sorry that most engineering graduates rush to get an MBA degree since the country does not offer rewarding jobs in manufacturing. They aspire to become white-collar executives saving themselves from soiling their hands. Success in financial and commercial careers has blinded our society so much as to name some as national heroes.

The biggest albatross around India’s neck, preventing its healthy manufacturing growth in the face of the globalization threat is the lack of efficient infrastructure for transport, power, roads and water supply. It is the basic reason for rural backwardness, mass illiteracy, poor healthcare, inefficient agriculture and a diminishing manufacturing industry. The impact of the inadequacy and inefficiency of this key input on the efficiency and productivity of our people is alarming and far-reaching. It is the root cause of inequality and disparity in regional development. The lack of essential infrastructure in rural India is also causing an alarming rate of growth of our cities, turning them into bigger and stronger magnets for migration of the rural population.  Unfortunately, the new investments in the development of infrastructure are, in majority of the cases, being pumped into the cities, thereby only adding to the problems associated with urban growth, rather than solving them.


Curse of the license-permit raj by bureaucrats continues in various other garbs

We still suffer from an inefficient and highly bureaucratic central administration that, in general, couldn’t deliver anything on time. Moreover, whatever it did was at high cost, and lacked quality and comprehensiveness. The so-called license-permit raj still persists even though licenses are gone and DGTD wound up. Poor efficiency, lack of work discipline and inadequacies in infrastructure has negated our strengths like low manpower cost and an English-educated workforce. Lack of ability to face global competition due to the prevalent work culture on one hand, and our failure to create the necessary infrastructure on the other, is indeed a deadly cocktail. The victim of this killer elixir is India’s manufacturing industry. The bureaucracy has seldom shown any initiative to change. I think that it is not at all in their interest.


Second war with China that we would lose

It is sad to see that China is all poised to win the second war it is forcing on us, this time with a different weapon. Interestingly, even China does not know of this war. China, a developing country in every sense of the word, has been attracting large foreign investments on its own terms and upgrading its exports from clothing and toys to high-end, high-tech, high-profit goods like cars, electronics and telecommunication. It is cleverly using its trade and investment policies to lure Western companies into China to achieve its own trade ambitions. It is forcing the Western and Japanese companies to bring in modern, state-of-the-art technologies and teach the Chinese how to use it. Today, China has all the modern technology that the greedy multinationals gave away in order to earn more, by shunning the labour from their country of birth and causing serious unemployment in their own countries. The Chinese were clever in just offering an unending supply of low-paid, but well-educated, dexterous and disciplined workforce with the promise of eventual access to the huge Chinese market. China has hundreds of millions of eager workers. It would be decades before it ran out of this low-cost source of labour. American aircraft companies and others finally learnt that they could sell their aircraft and other high-tech goods like telecommunications to China, only if they manufactured many parts of these goods in China and taught the Chinese to build their own businesses. One fine day, not too far away in the future, China is preparing itself to turn around and compete with these Western and the Japanese companies.


As compared to China, what is happening in our country is way too small. Today, except for computer software sub-contracts that pay us very well, India has shown no will or determination to benefit from globalization. Lack of our foresight is also visible in the fact that even in the IT sector—we have no product of our own! We just sell man-hours of our bright youngsters to create and upgrade products of the western multinationals. This is a great pity, indeed. No other country has frittered away it intrinsic strengths as blatantly as India has.


Other stories by PS Deodhar.


(PS Deodhar is founder and former chairman of the Aplab Group of companies. He is also the former chairman of the Electronics Commission of the Government of India and was an advisor to late Prime Minister Rajiv Gandhi on electronics. He also was the chairman of the Broadcast Council in 1992-93 that set in motion the privatisation of the electronic media with metro channels.)

Ankur Gaikwad
1 decade ago
Couldn't agree more on you take on the present scenario.Indians are blindly following the software boom and neglecting the "real-value-adding" sectors.What would you suggest an entrepreneur who wants to do something in manufacturing sector?
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