Promoting RIM (Reforms, Infrastructure & Manufacturing) - led Growth

A typical trajectory for emerging economies includes a transition from agriculture to low-end manufacturing to high-end manufacturing and services. India’s strong economic growth over the last decade has been primarily driven by the services sector, closely followed by the manufacturing sector. Many believe the next wave of growth in India will focus on manufacturing. The manufacturing sector is expected to drive India’s economy into the next decade and beyond.

India’s manufactured products are gaining wide acceptance within the global market, while strong domestic demand continues to drive manufacturing expansion. A recent study on the manufacturing sector in India estimates that Indian manufacturing exports have the potential to reach US$300 billion by 2015. For India, manufacturing sector growth is very important – manufacturing will create employment, and create an ambience of long-term, sustainable growth.

There are several key factors contributing to India’s competitive advantage in the manufacturing sector: (i) a large domestic market; (ii) a strong engineering/managerial capability; (iii) infrastructure/ location advantage; (iv) enabling government policies and regulations, and stable Govt. at the Centre, (v) skilled labor, English-speaking, relatively low cost work force (one of lowest labor costs per hour in the world) - a necessity in the labor cost-intensive, heavy manufacturing sector; (vi) a rich reserve of raw materials; (vii) highly educated engineers and professionals – well developed, highly educated work force, competent senior managers (about 8 percent of the Indian population from ages 25-34 have attained at least some tertiary education); and (vii) well-developed designing and machining capabilities.

Multinationals are increasingly setting up manufacturing operations in India, driven by India’s strength in skilled labor, available at a relatively low cost, and a vast emerging domestic market. Ford, Hyundai and Suzuki all export a significant amount of cars from India. ABB, Schneider, Honeywell and Siemens have set up manufacturing plants for electrical and electronic products, both for domestic and export markets - Cummins, DaimlerChrysler, and Toyota Motors in auto components and engineering; and Degussa as well as Rohm and Hass in specialty chemicals.

The domestic manufacturing industry base in India in industries like pharmaceuticals, auto components, cars and motorcycles is especially robust.

ICC’s agenda to promote a manufacturing-led growth is particularly relevant for Eastern & North-Eastern India, as the region has immense potential in Mining, Metals & Manufacturing. A state like West Bengal for example, had leadership position in manufacturing and therefore, must focus and create manufacturing hubs to create employment and efficiency. With its rich natural resources, Eastern India can be the flag bearer of manufacturing sector's growth in next decade. A significant portion of FDI in the mining and manufacturing industries can come into the East & North-East if investment promotion activities are strengthened and suitable policy measures are implemented. There is a huge scope for sustainable utilization of the Eastern region's rich natural resources and chart an action plan to propel the region as a manufacturing hub. The region has the potential of emerging as a prominent investment destination for industries like Iron & Steel, Auto-Components, Biotechnology & Pharmaceuticals, Leather, Processed Food, etc. Some of these sectors have already witnessed impressive inflow of capital over the last few years.

Manufacturing related reforms and incentivising manufacturing investments, will have to be pushed forward in India since the scope is enormous - rising GDP and personal incomes in India mean substantial increase in demand for all manufactured goods in this region, and this spurs domestic companies to invest apart from luring global manufacturing companies to set up their flags in India.  MNCs have also recognized that India is a good manufacturing destination due to its competitive cost advantages and the availability of skilled workforce.  The other force propelling the country to emerge as a manufacturing hub is that multinationals are looking for alternate suppliers outside of China.  While other Southeast Asian nations, including Thailand, Vietnam, and Cambodia, are also seeing a spurt in manufacturing, India has one big advantage over them : a home market of more than one billion people.  Indian wages are also relatively low, beginning at about $2 a day for factory jobs.  That compares with a minimum of around $3.50 to $4.50 a day in Thailand, depending on the area, and around $4 to $8 that some Chinese workers are beginning to command as labor shortages spread. China had a head-start in terms of supporting the manufacturing with low-cost, disciplined labor and this trend received support with its people living in the countryside looking to the manufacturing segment for employment.  It was a win-win situation for both the employees and employers: the employee was productively engaged and the employer had access to low cost/wage labor, thus fuelling the manufacturing boom in China.  Whereas, India evolved as a service center and provider, and relatively speaking, the manufacturing sector lagged behind.  Now the scenario is changing, and we have recognized the importance of Manufacturing in fuelling growth.  India has already become either the largest, or among the largest producers in the world for products like two-wheelers, cement, steel, generic drugs, laminated tubes, and polyester fiber.  The country has also emerged as a large producer of fruits, vegetables, milk, and eggs.  The world's largest motorcycle manufacturer, Hero Honda, and maker of CD-ROMs Moser Baer, are based in India. Thus, Manufacturing is steadily evolving as one of the most strategic areas for our country.

There is enormous potential for investment in India right now. However, in order to pursue equitable growth on a long-term basis, which is fuelled by the manufacturing sector, India’s needs robust infrastructural facilities; manufacturing requires different types of infrastructure: transportation, energy and telecommunications, for starters. The first and the most critical point is that the Government needs to ramp up investment in infrastructure, immediately to about 7% of the GDP and to around 9% in the next 1-2 years time. To achieve this, the Government requires to do two things; increase public spending substantially and at the same time create an investment conducive environment to encourage greater private sector participation in creation of infrastructure. The second aspect is improvement of delivery mechanism. Enhancements in infrastructure endowments reduces costs and increases the inducement to invest. Two of the most significant factors thwarting India’s manufacturing sector growth include the lack of infrastructure, including power and labour market rigidities. The share of services in the Gross Domestic Product grew from 50 per cent in 1991-92 to 63 in 2007-08 ; about half the Foreign Direct Investment (FDI) between April 2000 and November 2008 ($16.4 billion) had been in the services sector, with an insignificant share in labour-intensive manufacturing. This imbalance has to be corrected through suitable programmes and policies if India has to reach a double-digit growth which can create enough employment opportunities. The need for India to improve the quality of, and access to infrastructure is perhaps the top priority for the country to secure its future growth and competitiveness. It is of utmost importance to ensure the speeding up of the implementation of infrastructure projects already in the pipeline - this would certainly help economic growth to rebound. It is important to bring in long term capital for infrastructure projects – roping in PF and insurance money into the projects will be a significant move.   The govt. must strengthen the Bharat Nirman programme for development of rural infrastructure, and look at implementing the railway’s Dedicated Freight Corridor project. Developing capacity in power (renewable and non-renewable) and reducing transmission losses and power theft, would also be extremely important. Completing the Golden Quadrilateral project and reenergizing the 33,000 km National Highway Development Programme. , and improving the cargo handling capacity of ports must be priority areas.

In order to push economic reforms forward, and boost a job-led growth and competitiveness through infrastructure development and manufacturing revival, ICC feels that Govt., Industry,  International Agencies, and all other relevant stakeholders, will have to join hands and work together.

In this context, the ICC, in order to create a long-term Vision for India, has developed it’s theme for 2009-‘10 as  “Promoting Growth through RIM – Reforms, Infrastructure & Manufacturing” It is no doubt, a great challenge to fill up infrastructural gaps, and promote employment-generating growth through manufacturing revival and reform strategies - however, we are confident that we shall be able to deliver on this important agenda as it emerges during the course of the year, and the Chamber will play a crucial role in taking the country forward, in sync with the chosen Theme, through relevant and important initiatives and actions.