Moser Baer plant: The manufacturing sector grew at 11.2 per cent during April-October 2006-07 compared to the corresponding period of the previous year

For Moser Baer chairman Deepak Puri, India's manufacturing story has yet to unfold. "As far as manufacturing is concerned, I would call 30 years ago 30 BC (in a manner of speaking), 15 years ago 15 bc and now as Year Zero," he says. Puri's comment sums up the state of Indian manufacturing in the post-liberalisation years. The sector grew at 11.2 per cent during April-October 2006-07 compared to the corresponding period of the previous year. The Old Economy in India seems to have roared back with a vengeance.

But it wasn't always this bullish. The first few post-reforms years were traumatic for the sector that had for long been protected by high tariff walls. The worst hit were the small businesses, the backbone of manufacturing in any nation. "When the economy opened up, small and medium enterprises (SMEs) became the immediate casualty," says Puri.

The recession of the mid-90s followed. It was the worst of times. The doomsayers said Indian industry was going under. But displaying a resilience few thought it possessed, India Inc. invested heavily in modernising and upgrading capacities and on rationalising its bloated manpower. The process was painful, but the sector emerged from it leaner, meaner and fighting fit. Ravi Kant, MD, Tata Motors, remembers how the company cut almost Rs 2,000 crore in annual costs over a span of just a few years. "Our break-even point reduced from about 60 per cent capacity utilisation to 34-35 per cent," he says.

The tide has turned quite decisively. India Inc. is once again on a capacity expansion drive. So are several foreign companies (see Talking Big Bucks). And many Indian companies are aggressively eyeing overseas markets. What has caused this change? Liberalisation has, over a period of time, created an extremely robust and hungry-for-consumption domestic market. This is creating demand for manufactured products. Want proof? Look at the telecom sector. The total subscriber base crossed 180 million, and the country is adding an average of six million mobile subscribers every month. Result: there is a veritable boom in the associated manufacturing segments. Finnish telecom equipment company Nokia has invested $200 million (Rs 900 crore) on a mobile handset manufacturing unit here. Says Jukka Lehtela, Director (Operations), Nokia: "India is one of the fastest growing telecom markets in the world and it is, therefore, imperative for companies to be closer to the customers by being present in it." About 80 per cent of the output at the Nokia Telecom Park in Tamil Nadu is sold in India.

Wanted, labour-intensive industries: High-tech manufacturing alone cannot take India to the next level. Policymakers now want to focus on other sectors such as textiles and food processing to generate more jobs

A thriving eco-system of suppliers and vendors is also helping manufacturing grow. Tata Motors, for example, outsources nearly 80 per cent of its mini-truck, the Ace. There are significant cost advantages as well. According to McKinsey, it is possible for a Fortune 500 company to manufacture products in India at about 70 per cent of the cost of a similar product in the US (see The India Edge). Tata Motors' Indica costs about 40 per cent less than what a comparable car developed in the West would have cost.

The China factor has also helped the manufacturing sector significantly. "Many companies are trying to diversify away from China so as to better manage their currency, political, and other risks; these companies are now looking at India as an alternative destination," says H.C. Ryu, MD, Samsung Telecommunications India.

This has also made India the destination of choice for MNCs looking to outsource manufacturing to low-cost countries (LCCs). McKinsey believes that "India has a real opportunity to benefit from the growth in global offshoring of manufacturing, particularly in skill-intensive industries where it has a natural advantage." Already, half of all global offshoring by us companies involves skill-intensive sectors and that figure could rise to 70 per cent by 2015. And India can well emerge as one of the three largest exporters among LCCs with manufacturing exports of $250-300 billion (Rs 11.25 lakh crore-13.5 lakh crore) by 2015, McKinsey estimates.

These aspirations are, however, contingent on India setting its house in order. Manufacturing cannot survive in isolation. "Poor infrastructure, overburdened ports and airports, stringent (and inflexible) labour laws and the absence of world-class export zones are some of the issues that need to be addressed before India can position itself as an ideal destination for manufacturing," says Ryu.

According to Kumar Kandaswami, Senior Director, Deloitte Touche Tohmatsu India, poor infrastructure adds 3-6 per cent to the Indian manufacturer's cost of doing business even as there is a gain of 4-5 per cent on account of engineering and R&D skills. "We may have an advantage upfront, but our companies are haemorrhaging money due to creaky infrastructure," he says.

An automotive industry estimate three years ago had placed the cost differential between India and China at 22-24 per cent; nearly two-thirds of this was attributed to interest rates and the cascading impact of taxation, while the balance was due to logistics issues and the rigidity in the labour market.

The absence of a common market in India is also a huge drag. Puri explains: "We are 29 countries-each state is a 'kingdom' in itself. China is one country." The rationalisation that began with the implementation of Value Added Tax in 2003 will take another few years to complete, he reckons. This is expected to reduce the cost differential between India and China to a more manageable 5-6 per cent. "Indian manufacturers will then be better equipped to take on China," says Kant.

However, even as corporate bottom lines improve, an uncomfortable social question has popped up. The impressive figures, which were fuelling heady GDP numbers, were riding on what economists call "jobless growth" (see Where are the Jobs?). "India needs to create 8 million jobs every year incrementally to sustain even the current rate of unemployment. it and it services cannot provide that sort of employment," says Ramesh Mangaleswaran, Partner, McKinsey & Company. The implication: the manufacturing sector must do its bit to generate jobs. To fulfill this role, attention has to be paid to the less high-tech and more labour-intensive manufacturing segment. "India cannot focus only on high-tech manufacturing. It also has to manufacture lots of cheaper, less sophisticated products," says Rajiv Kumar, Director and Chief Executive of economic think tank ICRIER (Indian Council for Research on International Economic Relations). No surprise then that policymakers want to promote industries such as textiles and food processing which generate large volumes of employment.

However, if India is attempting to nibble at the lower end of the food chain, then the Chinese are simply moving up the value chain. Even here, India will have to work hard to retain its competitive edge. It will be a long and hard grind. "We cannot be seduced into thinking that we have arrived," says Kant. True, but a good beginning has been made, and, as the Chinese saying goes, a job well begun is half done.

-additional reporting by Shaleen Agrawal