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APRIL 8, 2007
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Business Today,  March 11, 2007
Manufacturing Makeover
India's once hamstrung manufacturing sector is now breaking into a sprint. Growth in this sector has accelerated compared to the 9th Plan, but it is unlikely to touch 9 per cent over the entire 10th Plan period. To sustain an average growth rate of 10 per cent during the 11th Five-Year Plan, double-digit growth in manufacturing is necessary. Even as the services sector jogs along, big hopes rest on manufacturing, which should now gear up to meet the Chinese challenge.

India posted an economic growth of 8.6 per cent for the quarter ended December 2006, a pace that was at the lower end of the country's growth rate of 9-10 per cent for the past several quarters.

The manufacturing sector, which accounts for about one-fifth of India's GDP, slowed slightly in the quarter, but still posted a very strong 10.7 per cent gain, year-over-year in the quarter ended December 2006. Unlike many of its Asian neighbours, India's manufacturing sector has not been driven by cheap exports of goods. This is because the government and business have focused capital on growth of India's service sector, which is unique to any country in the world, rather than developing the manufacturing sector.

For foreign firms, investing in India comes at a cost and with associated risks. India's infrastructure is in need of massive investment. While power reliability, living conditions, and road congestion are improving, they are still nowhere near the levels that businesses enjoy, say in the United States. The country's bureaucratic mind-set runs deep, from the government to the lowliest street vendor, making seemingly simple tasks take much longer.

At one hand, India needs to fight such odds to become a true manufacturing destination for the world and on the other hand India has to allow labour reforms -- something which already has been brought about in China.

Mostly, India's manufacturing sector has been driven by domestic demand. But India's manufacturers also face substantial headwinds due to a dismal domestic infrastructure, a high level of government ownership, and too much of red-tape for bringing in foreign investment. These factors weigh heavily on innovation, competition, and development of highly efficient, large-scale manufacturing facilities.

It is the same story for fast growing and promising sectors like real estate or automobiles. It takes months to clear proposals and to obtain permits. Also, interested parties have to grapple with frequent change in government in the states. As a result, the entire process needs to be started again.

A comparison with other major Asian countries shows that the size of the value added in the Indian manufacturing sector ($66 billion in 2000) was less than one fifth of the Chinese manufacturing sector at $373 billion and even less than half of the Korean manufacturing sector at $144 billion.

Share of the manufacturing sector in India's GDP has remained stable at around 16 per cent, while in China the manufacturing sector accounted for around 35 per cent of the GDP and in the case of Korea, it was 31 per cent.

The 11th Five-Year Plan says that manufacturing sector has to grow at 12 per cent per annum to sustain an average GDP growth rate of 9 per cent. It plans to fill the gap of infrastructure bottlenecks within the next 5-10 years.

However, it's not all gloomy. This sector has been doing well in the recent past. In the last three years of the UPA Government, the growth rate in manufacturing has accelerated from 8.7 per cent to 9.1 per cent and further to 11.3 per cent year-on-year basis.

Lead-time for new product development has come down by as much as 50 per cent in the past three years. For example, the development of the brake system in India takes 6 months, in Korea it is 8 months, in Germany 12-14 months. Inventories are being reduced too -- by about 20 to 30 per cent in the last four years, added to which is the reduction in defects -- from about 20,000 parts per million (ppm) to below 100 ppm. On a scale of 1-10, Indian manufactured goods quality could be 7, against Germany's 9.

The story of India's innovative moves in manufacturing does not end here. If we believe the 'Fast Track Leadership' survey of business professionals conducted in October 2005 by IMD MBA, Fast Company magazine and human resources firm, Egon Zehnder International, it is now well poised to grab US' market share in certain business sectors. According to the survey, China and India are likely to gain significant market share from the US in the IT, automotive and Internet business sectors in the future.

It is important to note that robust growth of the manufacturing sector is imperative, because it is one of the few opportunities, outside of the service sector, which can provide employment for the rising wave of workers streaming into urban areas in search of higher paying jobs.

And given the UPA government's prime motive to bring inclusive growth in the country, a fillip in manufacturing sector could be just what the doctor ordered.