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India: The Future Manufacturing Hub

Posted in Finance Articles, Total Reads: 8158 , Published on January 30, 2013

India is usually known as the third world economy. Third world economy has a few typical characteristics like it produces mainly primary products for the developed economy and also provides markets for their finished goods. In short a third world economy produces agricultural products and is far from being a player in the manufacturing sector. If we look at the contribution of different sectors to the GDP of India it shows that a major part comes from the service sector.

Image courtesy of FreeDigitalPhotos.net

The above pie chart shows the distribution as on March 2012. The manufacturing sector contributes only 15% to the GDP which is far less than other developing economies. Manufacturing in China contributes 34%, in Malaysia 25% and in Thailand 40%.  The growth in manufacturing sector has been slowing down during the last 10 quarters. The net profit margin has reduced from 8.1% in Q2FY11 to 5.4% in Q2FY12 which is the lowest in the last 12 quarters.

However if we consider the statistics we come to know that India has the potential to become a leader in the manufacturing business. India has a workforce of 440 million between the ages of 15 to 34 years. The labour here is among the cheapest in the world it is only 25% of that in China and around 7% of that in the U.S.

There have been steps taken in order to boost manufacturing sector growth in India. The SEZ Act 2005 is one such step which made provisions for the formation of 587 SEZs. However this has been a failure and only 154 SEZs have been operational until the last year. So a further step was taken and the New Manufacturing Policy or NMP was formed in November 2011 which aims at having a growth of 14% for the manufacturing sector. So having all these policies with ambitious figures in place where does India lack today? There are some factors that can be considered which can help India in this sector.

What will make India a future manufacturing hub?

Following are some of the parameters which will be the drivers in making India the centre for manufacturing in the world.

Infrastructure: Infrastructure will form a very important role in the development of manufacturing sector in India. Currently majority of the movement of materials from a manufacturing plant to the market takes place via trucks. However the movement in such a way is costlier than that through railways. Also the average load carrying capacity of the trucks is minimal compared to the trains where a bulk can be transported in a faster and a better way. Also there are manufacturing plants which are near a harbour or a water body in the country and in case of oil rigs the extraction is within the water body. So development in the railways network and the water transportation can be considered as a healthy investment which can attract FDI which becomes a very important part for the growth of Indian industries. Apart from these the development of DMIC or the Delhi Mumbai Industrial corridor aims at developing all the four transport routes between these two strategic cities to improve upon the infrastructure. Nine industrial zones have been identified and this project will surely bring about a huge investment from across the world.

Power: Power is another area where India can improve upon a lot. The recent power grid failure in July 2012 affected almost the whole of north India and caused crores of rupees of losses. The National Power Grid Corporation strives for establishing a national power grid and if this is achieved then a major problem will be solved for the industrial sector. India must add about 76 GW of power generation capacity by 2017 in order to meet the increasing needs.

Robust information system: With the movement of materials one more thing becomes very important like the tracking of the materials and the order status. Here the help of the latest technology like GPS, cloud computing and RFID can play a very important role. This would be an add-on to the efficiency of the manufacturing sector.

Government Policies and Bills: The movement of materials takes place across many states in India. The problem here lies with the taxes being levied on the goods varies from region to region. The tax structure itself is very complicated in India. The unified and simplified tax structure like GST can make things much better and faster thus improving the whole scenario. The land acquisition bill and environmental clearances have also been a major hindrance in the development of SEZs in the country. The land leasing can be a very good option where the lease terms have been properly written down so no disputes arise. Though environmental clearances are also a top priority there has to be areas selected properly to develop the SEZs in the country where there would not be any kind of environmental issues.

Development of Rural areas because of manufacturing: Development of the manufacturing sector in India will improve the rural economy to a great extent. Though the labour force in India is huge there is a lack of skilled labour in India. So the initiatives like the National Skill Development Fund being allotted Rs. 1100 crores is a visionary step taken by the Government of India. Though this is just a baby step which will largely develop skilled labour for India, if there is a sustained investment in this area then skilled labour would no longer be a problem for India. Also there would be sourcing of raw materials from rural India which will help in improving the standard of living of the people. E.g. ITC’s incense stick business sources its raw materials from the ingredients processed by the women in rural India.

China v/s India:

When we want India to be a manufacturing hub we will have to compare it with the current manufacturing hub “China”. China’s manufacturing sector contributes to 43 % of its GDP. This is very high as compared to India. China’s share in global manufacturing sector is 1.74 tn $ in 2010. [3] But, from the PMI data in the graphs shown below we can see that the industrialists are wary about China’s manufacturing sector whereas in India’s case there is a positive response by the majority. Hence we can say that the growth rate of India’s manufacturing sector is better than China’s. NMP plans to improve manufacturing sector’s share in GDP to 25%. If this becomes true then there are very bright chances that India can match as well as beat China.

Source: http://www.hsbc.com/1/PA_esf-ca-app-content/content/assets/emi/2012/in_manufacturing_eng_1210_lite.pdf [2]

Also there is ray of hope currently with many big companies making India as their manufacturing hub.  Japanese consumer electronics major Panasonic will start exports of home appliances from India as part of its plans to make the country a manufacturing hub and the first shipment is likely by 2014-15. [4] Skoda is also planning to make India as its manufacturing hub. Solar equipment major players such as First Solar are also planning to make India as its manufacturing hub.

This article has been authored by Niket Gajra and Parth Pandya from SIMSREE.

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