Manufacturing – Theme for the Next Decade- Opportunities and Challenges

Manufacturing has been the Achilles Heel for India for the last many decades. The percentage share of manufacturing in overall GDP has always remained in the mid-teens. Countries like China and South Korea have 25-30% share of manufacturing in the overall GDP.

Things are fast changing now. Post Covid there has been a huge disruption in the supply chain globally. For example, the shortage of semi-conductors due to overdependence on one country led to a standstill situation for many global companies. The world has realised that China plus 1 strategy of diversifying their supplier base is paramount given the delicate geo-political situation we live in.

Only India can provide the resources in terms of skilled labour that can help accelerate this shift. We have seen positive government policies like Production linked incentive (PLI) scheme in sectors like electronic manufacturing to lure global MNCs towards manufacturing in India. As per a recent report from JP Morgan, by 2025 it is expected that 25 percent of all Apple products will carry the Made in India badge. This was unimaginable just a few years back.

Another trigger has been the Russia-Ukraine war that has resulted in a brutal energy crisis across Europe. This has led to the realisation that more needs to be spent on energy infrastructure to avoid such disasters in the future. India can become a global exporter and partner for energy-related manufacturing needs. The largest segment of growth will come in markets such as Europe, which is currently under a huge degree of energy crisis as well as conflict.

However, the bed is not full of roses. There are many challenges that need to be addressed so that manufacturing can really take off. Although, we have a huge potential labour workforce, the labour participation rate is among the lowest in the world. Over two thirds of the labour force is stuck in the unproductive sector. This is because our education system does not provide adequate technical skills to join the workforce. Even many engineers who get into top IT services companies in India have to get themselves rigorously trained for 6-12 months to get into projects.

Next there are archaic labour laws which prevent companies to hire and fire depending on the business performance. Even countries like Bangladesh have a more liberal policy when it comes to labour laws. In India we have seen the power of trade unions, who go on a strike according to their whims and fancies and jeopardise the entire operations of a company. If we look at states like Gujrat and Tamil Nadu, which have done well in manufacturing, we will realise that they have had a more skilled labour force and relaxed labour policies. Over the last few years, we have seen improvement in labour laws in states like Uttar Pradesh which have attracted more investments for setting up new factories. The government has brought in four labour codes to replace 41 central labour laws. This has made it easier to lay off employees and reduce the power of trade unions. There is more scope to simplify further.

Another important aspect to look at is that female participation in the labour force is extremely low (less than 25%). Southeast Asian countries like Vietnam have 73% female labour force participation, while figure in China is 61%. The low levels of female participation in India will lead to a shortfall in skilled labour in the manufacturing sector in the mid to long term despite the high population.

For any manufacturing entity to do well there has to be value addition and cost competitiveness. Energy costs have always been very high in India as agriculture sector has always got energy at subsidised rates and industrial rates have been pushed up to neutralise that. Also, the inefficient operations of the discoms, where AT&C losses have remained more than 20%, have resulted in higher costs for manufacturing and brought down the competitiveness of our manufactured goods. Developing countries like Indonesia and Vietnam have 25% lower energy costs compared to India. We have to reduce this gap to ensure that our industries become more competitive. The Electricity Amendment Act aims to reduce the AT&C losses in future and aims at increasing competition and fiscal discipline among discoms. Also, the government would directly transfer a subsidy to the end consumers and farmers, instead of overcharging the industries. This way the discoms can improve their pricing and provide electricity at cheaper rates to industries.

For any country to do well in manufacturing there needs to be a robust judiciary to enforce contractual rights and obligations. In India we are accustomed to hear about ‘Tareek pe Tareek’ (court date after court date) and huge delays in getting a verdict. It is estimated that an average case takes about 4 years to get solved in India and a large part of the claim recovery, even if it succeeds, goes into litigation costs. We need to have more judges and faster resolution of cases to make the ease of doing business a reality.

Logistics is another area where we need to focus. In India the logistics costs are about 13-14% of the GDP while in developed countries it is 7-8%. Even though road transport is more than three times expensive than rail, majority of the logistics movement still happen by road only. The government is trying to solve this through the National Logistics policy. It is extremely critical for us to reduce this cost to make our products globally competitive. The only way this can be done is to increase the share of railways in the overall freight transportation.

One sensitive area that even the present government with full majority has been unable to reform is land. As per a world bank report India ranks 154^th in terms of property registration rights. Projects have cost overrun due to various litigations involved in land titles. Also, the cost of owning land in terms of stamp duty charges are much higher than countries that we compete with to get more FDI, like Vietnam. Land records need to be digitised and bureaucracy has to be brought down so that land titles are more seamlessly allocated to more productive users.

If India’s GDP has to grow at 7%-8% in real terms in a sustainable way then we need the manufacturing sector to fire on all cylinders. External events like Covid-19 and the Russia-Ukraine war have been a blessing in disguise for the manufacturing sector with more emphasis on shifting production from China to countries like India and Vietnam. The government has proactively brought in lots of economic reforms over the last five years. The ease of doing business ranking for India has dramatically improved from 142 to 63 in last five-six years. There have been multiple policy initiatives such as the introduction of Goods and Service Tax, reduction in corporate tax, indigenisation of the defence sector, introduction of Production Linked Incentives (PLI) and development of the National Infrastructure Pipeline. All these are the right steps to provide boost to the manufacturing sector.

Yet there is a further need to implement tough reforms in land, labour and logistics to ensure that we don’t miss this once in a lifetime opportunity. Unless we excel at manufacturing, we won’t create the necessary job opportunities for our people. As per William Arthur Ward, an American writer – “Opportunities are like sunrises. If you wait too long, you miss them.” This is India’s opportune moment and as an optimist I hope that we grab it with both hands.

Disclaimer: “Any views or opinions represented in this blog are personal and belong solely to the author and do not represent views of CFA Society India or those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated.”

About the Author:

Vaibhav Agarwal, CFA is the Head of Research at Basant Maheshwari Wealth Advisers LLP and has been an integral part of the firm since 2017. He is also a Chartered Accountant, a Company Secretary and also has a Master’s degree in Finance. Vaibhav has more than 14 years of experience in stock market investing across sectors and stocks. He has worked with several global investment banks and multinational companies in various roles. Vaibhav provides regular opinion on markets, economy, sectors and other business angles through columns and speeches. Vaibhav enjoys watching and playing tennis, as well as reading books, apart from his passion towards stock market investing.

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