Dear all, here, I am sharing my thoughts and findings on the recently approved National Manufacturing Policy by Government of India (GoI). This policy, if successfully implemented can change the face of rural India in the next decade, please share your views.
National Manufacturing Policy Objectives
This policy aims to propel growth of manufacturing output. The objectives are to:
1)Increase share of Manufacturing in Gross Domestic Product (GDP) to at least twenty five percent by the year 2022.
2)Create one hundred million additional jobs by the year 2022.
In addition, it aims to impart manufacturing skills in rural population, and build the technology required to create products that are globally competitive.
Why manufacturing growth is important?
The fact that most of the services industries/services exist to support manufactured products (with exceptions such as media, entertainment, and personal care) underscores the importance of strong manufacturing sector for overall economy. Although, India currently amasses foreign currency by selling services (such as IT, BPO, and KPO), conventionally countries earn foreign exchange by selling products across borders.
Manufacturing provides employment to people of varied skills and it is the biggest source of employment for less-educated. India, with only about 27 percent of working-age population (aged between 15 and 65) educated beyond secondary school level (tenth standard), the obligation on Government to create employment opportunities for wider population cannot be over emphasized. The challenge of ensuring employment and social security for wider sections of population will only be compounded as India grows to become the most populous country by 2030, surpassing China.
Unlike service companies that create mostly direct employment, manufacturing companies create indirect employment through their supply chain partners, besides direct employment of factory workers. A major challenge India faces is the growing social divide between rich and poor. Strong manufacturing base will reduce this divide by proving employment to less privileged citizens of the country.
According to Reserve Bank of India (RBI), manufacturing contribution to GDP has increased only by two percent, i.e. from thirteen percent to fifteen percent over the past three decades. This growth is very low as compared that of China. Despite China’s GDP growing at above eight percent since 1980, manufacturing contribution to GDP has always been above thirty percent (indicating manufacturing has kept its pace relative to over all GDP).
Implementation – Industrial Clusters/Parks
In the Manufacturing Policy, GoI proposed to establish industrial clusters/parks to achieve the targeted production and create employment. An industrial cluster is co-location of group of companies belonging to a specific sector (such as automobile, leather), for example, leather goods manufacturing clusters in Italy and wine production clusters in California. The group of companies includes manufacturers, suppliers, R&D providers, educational institutes, etc. Co-location of firms in a cluster enables sharing of human resources, plants, equipment, and storage, etc, and provides benefits of economies of scale for all the firms involved in the cluster regardless of each firm’s individual size. Firms within a cluster compete to differentiate from each other and in the process become more productive and innovative. Eventually, few firms will become globally competitive earning respect for themselves as well as for the cluster. Silicon Valley, an IT cluster, is another great example.
In addition, GoI proposes to reduce delays involved in carrying out formal procedures to set up and run manufacturing units by ensuring all such formalities can be completed quickly within the cluster vicinity, eliminating the need for entrepreneurs to run from one Government office to another for permissions.
Manufacturing requires continuous supply of energy; many state governments are unable to meet the electricity requirements of existing manufacturing units. Though, GoI has taken initiatives to increase electricity generation by investing in nuclear and hydroelectric power plants, considering future demands and distribution inefficiencies, supply of electricity to industrial clusters will be a challenge. If Government has to subsidize electricity to allow manufacturing companies earn profits initially, hence to encourage new generation of manufacturing entrepreneurs, annual fiscal deficit increases curtailing investments for other development and welfare initiatives.
Majority (currently, about 53 percent) of Indian population has been employed in agriculture for decades. Hence, skills development programs for creating manufacturing workforce are required in massive scales. However, given the state of education systems and resource shortages even at University level, building skilled workforce will be a challenge. Considering cultural and language differences from one state to another, such training programs demand active participation and commitment from state governments and local authorities. But, is it realistic to expect such commitment is the question.
Adequate steps must be taken to avoid using fertile land for industrial purposes. Though, India’s farm output is the second largest in the world, productivity is very low. India’s agricultural Value Added per Worker (VAW) has increased only by about fifteen percent as compared to sixty percent increase in China’s VAW and hundred percent increase in Brazil’s VAW, from 1990 to 2004, according to a European Commission report. The VAW are 385, 525, and 3760 units for India, China, and Brazil respectively. Any decline in agricultural output due to decline in either land availability or workers availability for farming will have negative consequences on food inflation.
Apart from the above mentioned challenges, wide-spread corruption, unstable political environment, lack of proper infrastructure such as rail/road connectivity to rural areas and access to financial sources will impact successful implementation of the policy. Nation’s ability to attract private (as well as foreign) investments into manufacturing has to be questioned considering recent scams and gloomy global economic scenario.
India has two advantages. Firstly, the average hourly compensation to a manufacturing worker in India is about $1.0, which is a fraction of compensation in US and less than the compensations in China and Brazil. Secondly, India’s working-age population will be much higher than China’s working-age population over the next few decades.
Few of the debatable items are:
1) How will this policy impact Agriculture ?
2) Can Government actively and impartially participate in developing industrial clusters ?
3) Can Government provide necessary electricity and infrastructure ?
4) Is our education system in a position to support this initiative ?
5) How long will it take to produce Globally competitive products ?
6) Honestly, has this policy been much delayed ? Should it have come long ago ?