Challenges of Indian Manufacturing Sector 

Challenges of Indian Manufacturing Sector 

(GS 3, Economics, The Hindu,  Excerpts from an interview of  Dr. Pawan Goenka, Chairman, Steering Committee for Advancing Local Value-Add and Exports (SCALE) with The Hindu)

The Indian manufacturing sector has been lagging behind for a long. We need to give an essential look into its various factors to make it more competitive. It has to be Cost-effective and rich in quality.

There is a misnomer in the market that lower labor cost makes the Indian manufacturing sector competitive. There are various other factors that have to be counted.

First is the Scale of Production – We give all emphasis to the ease of doing business but at the same time, the scale of production is equally important to lower the cost of production. Industry people have to come forward to invest 4 large scale and the government needs to facilitate these projects with viability gap. Viability gap basically means, in case of industry people lacks in terms of fund the government should come forward to fill the gap. Sometimes it is termed as Viability Gap Funding. Our Industry people have to consider the advantage of the large scale of production as in China. 

Second is the cost of land and power. Our industrial land is one of the most expensive lands in the world. Our Industrial power is the most expensive in the world and a part of this is overburdened by cross-subsidy. In this competitive world market, the Indian manufacturing sector cannot afford the overburden of cross-subsidy. 

(Cross subsidization is the practice of charging higher prices to one type of consumer to artificially lower prices for another group. The National Tariff Policy 2016 puts limits on cross-subsidies at 20% of the average cost of power supply. While the cost of power supply at the national level is around `6 per unit, average tariffs for commercial and industrial users are higher by 52% and 23%, respectively. On their part, domestic and agricultural consumers pay bills at rates 27% and 87%, respectively, lower than supply costs). 

Third is the cost of capital – The cost of capital in India during normal years ( except for the years of covid like 2020 and 2021) is 20 to 30% higher than in most of the countries which are exporting. The capital area is no doubt, well acknowledged by the RBI and the government as they regularly take steps to ease it.  

Thus in our country, these factor costs like of land, capital, energy etc are very high in comparison to the average of the world market. 

The fourth area is regarding labor Productivity and Skill which is primarily the industry’s responsibility. But the government has to play important role in skill development on a mass level. Central government schemes like Pradhan Mantri Kaushal Vikas Yojana for Technical Institutes (PMKVY-TI), Employability Enhancement Training Programme (EETP), National Employability Enhancement Mission (NEEM), AICTE-Startup Policy, Skill Assessment Matrix for Vocational Advancement of Youth (SAMVAY), Leadership Development Programs, etc. are running on the same line. 

The fifth area is to strengthen the micro, small and medium enterprises (MSMEs)A strong MSME sector would be a kind of primary requirement if larger companies go for scale production because they cannot do everything of their own. Although the government provides various incentives to MSMEs, better technology and skill will make them stronger. They need to adopt new and better technology but we have witnessed a very slow adoption rate.

Excessive logistics costs, High import duties on raw materials and machines, and Over-regulation are other crucial areas of concern. Under Logistics Costs comes the cost of acquiring, storing, and transporting the resources to their final destination.  India’s average logistic cost as per the government data is 13% of the revenue when the global average is 8%. So India has a 5% disadvantage because of logistic costs.

Making the Indian manufacturing sector more competitive through artificial means like increasing the import duty/tariff or by putting non-tariff barriers on imports must be short-term and only for few cases. High import duty especially in the case of raw materials affects the Make in India concept. Increasing tariffs leads to high consumer prices. 

Our Free Trade Agreements (FTAs) with many countries in Europe, Southeast Asia, Middle East Africa, have a disadvantage compared to others with more favorable FTAs.  India has always requested to see if some steps can be taken to create a level-playing field where India is disadvantaged, rather than saying ‘let’s get the lowest tariffs’ to export everywhere. That is clearly not practical and feasible. Tariff reduction is not one-sided. It is always a two-way street. India cannot seek entry for Indian exports and continue to have high tariffs on imports.

Vietnam, one of our big manufacturing competitors now, has already sealed FTAs with the UK and EU…                                    India was a $2.87 trillion economy with about $229 billion of manufacturing exports before the COVID pandemic. 43% of India’s total export comes from manufacturing, which has been lower than countries like Vietnam, Malaysia, and Thailand.  Vietnam, for example, is at 80%, Malaysia 70%, Thailand is 56% in terms of manufacturing exports as a percentage of exports. 

The second aspect is that India’s export is often low value-added. India is poor in high-tech, with a contribution to export coming from high-tech sectors is very dismal at only 10%. Malaysia is 52%, Vietnam is 40%, Thailand is 23%. Vietnam has also focused very heavily on exports in the last decade or so, and a lot of manufacturing from china has moved to Vietnam, often owned by Chinese companies, but in any case, adding value in Vietnam.                                                                                                                                        The third aspect is regarding no disadvantage for market access through equitable FTAs and preferential trade agreements,

The fourth aspect is technology and quality. We know India’s spend on Research and Development (R&D) is amongst the lowest at only about 1.5% -1.6%, as opposed to the global average of 3.5-4%. And more importantly, the industry is not interested enough in R&D, but it has to come forward and invest more. The government has to facilitate and incentivize the industry to go for more research and development initiatives.  

Finally, Brand India is not strong enough overseas for manufacturing. It is more known for cheap products rather than excellent products, which is not a good perception. And we need to change that. The AatmaNirbhar Bharat is a very motivating slogan in this regard.

Md Layeeque Azam, Economics Faculty

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