Manufacturing's Winning Industries
Indian manufacturing is still an also-ran globally, but a clutch of industries is making itself felt in the world markets.

By R. Sridharan

The National Strategy for Manufacturing aims at a manufacturing sector growth of 12-14 per cent for the next 10 years

Say 'manufacturing' and the name that pops up in everyone's mind is China. For good reason. According to some estimates, half of the world's cameras, a third of air-conditioners and televisions, and a quarter of washing machines are manufactured in China. That gives China, 92 per cent of whose exports comprise manufactured goods, a share of 6.46 per cent in world exports. What is India's share? 0.82 per cent (About three-fourths of our exports are manufactured goods).

Why does manufacturing in India lag? There are several reasons, the major ones being that China opened up to foreign direct investment (FDI) more than a decade before India did, and thus became the global factory for large American and Japanese corporations. Only between 2003 and 2005, China received more than $187.5 billion in FDI, while India managed just $16.6 billion. Worse, India continued to reserve goods for manufacture in the small-scale sector, which today has neither the scale nor the financial muscle to tap global markets. While industries have been privatised and items unreserved, manufacturers in India continue to be hobbled by a variety of issues, ranging from infrastructure to bureaucracy to higher financial costs (9.5 per cent, compared to 4.1 per cent in the us and 3.7 per cent in China, for listed companies between 2002 and 2004, according to a McKinsey study). Ultimately, what the systemic inefficiencies mean is higher cost of doing business in India, be it by way of captive power plants, greasing palms, or maintaining bigger inventories because of transportation problems. "A lot of China's growth comes directly from the investment in infrastructure," says Kumar Kandaswami, Senior Director and a manufacturing industry expert at Deloitte Touche Tohmatsu India.

It's impossible to overstate the importance of manufacturing to an economy like India's. First and foremost, it can be a major source of employment. China's booming manufacturing sector, for instance, sucks in 1 per cent of the farming population every year. In India, the figure is estimated at half a per cent. If the economy is to grow at 8 per cent-plus, then manufacturing, which accounts for (a stagnant) 17 per cent of GDP, has to start growing faster than the 8-9 per cent it has logged in the last couple of years. The good news: It seems to be picking up pace. In the first quarter of this financial year, manufacturing grew at 11.3 per cent compared to 10.7 per cent in the same period last year. The hope now is that manufacturing growth will cross the double-digit figure for the whole of 2006-07.

But can manufacturing sustain its pace over the long term? It depends on how the global economy fares, but the government does have a plan in place to kick-start the sector. The National Strategy for Manufacturing, a comprehensive plan developed by an expert group set up by the Prime Minister under the National Manufacturing Competitive Council (NMCC), aims at a manufacturing sector growth of between 12 and 14 per cent per annum for the next 10 years. Among others, the strategy is aimed at increasing the breadth and depth of manufacturing, improving efficiencies of companies and encouraging cluster activities. As a result, NMCC hopes to increase manufacturing's share of GDP to 30-35 per cent by 2020.

It's unlikely the target will be met. There are simply too many constraints-largely related to infrastructure-that need to be overcome. Yet, there are a handful of industries in India that have begun to become globally competitive because a) they have honed their process skills to a great extent, b) have the advantage of being vertically integrated, or c) have been able to tap into the global supply chain of large customers. One test of global competitiveness is the ability to withstand foreign competition in home markets. Another, the bigger test, is the ability to compete with a multitude of suppliers in international markets and win. Apply the second test, and the number of industries that can be considered globally competitive shrinks-to, by expert consensus, five. Which are these? In alphabetical order, auto components, electricals and electronics, pharmaceuticals, textiles, and specialty chemicals. Here's a look at why these industries are competitive and how they plan to build on their nascent gains.