Indian: Manufacturing a Future for India’s Demographic Dividend – February 2014
British High Commission New Delhi
India’s high growth has been driven by services, as opposed to manufacturing; which has stronger potential for employment generation. Even within manufacturing, India seems to have developed a niche in capital intensive industries; ignoring one of its biggest comparative advantages – abundant labour. China is forecast to shed around 85m labour-intensive manufacturing jobs over the next decade. And India’s 480 mn strong workforce is expected to expand by over 150 mn in less than twenty years. Will it catch the tide?
92% of India’s working population is in the informal sector. More than 50% of the population is engaged in agriculture; which has lower productivity than other sectors. There is a gradual shift towards non-farm activities; but these new jobs are not transitioning from farms to factories. Rather they are being diverted into the construction sector, low skilled services or self employment; avenues that offer less scope of remuneration, skill development and social security.
Why not manufacturing?
India ranks 132 out of 185 in the World Bank’s ease of doing business index. Outdated labour law, policies which inadvertently incentivise businesses to remain small and a lack of appropriate exit policies for failing enterprises are particular problems.
Finished goods are also taxed at lower rates than raw materials. These inverted duty structures can make Indian manufactured goods which depend on imported components uncompetitive. Some of these anomalies stem from free trade agreements. For instance FTAs with South Korea, Japan and ASEAN have affected sectors like aluminium products, capital goods like boilers, cement, chemicals, electronics, paper, steel, textiles and tyres.
India’s infrastructure deficit presents an additional challenge. Creating new infrastructure is not easy. The power and transport sectors are burdened with problems of policy, implementation, and complex approval processes. The National Highways Authority has moved away from Public Private Partnerships due to lack of interest.
There is a spillover to skill development. Small firms are less inclined to invest in skills. India currently has skilling capacity less than 20% of the industry requirement. The quality of training suffers from a shortage of good trainers, low curriculum relevance, and lack of standardization. While India’s top end business schools produce international calibre candidates, they often disappear overseas.
As a result, India has lagged in manufacturing. Successful firms have specialised in capital intensive techniques and temporary labourers with less investment in large scale human and skill development. Hence Indian companies have become global players in pharmaceuticals and cars, which are more dependent on sophisticated technology; rather than more labour intensive sectors like shirts or toys.
The government recognises the urgency. The National Manufacturing Policy refers to creating 100 mn jobs by 2025. Sixteen sectoral and ten cross cutting working groups have been set up by the Planning Commission to see this through. Among its proposals are large manufacturing zones mirroring cities that will become islands of economic prosperity. The Delhi, Mumbai and other proposed ‘industrial corridors’ are products of this thinking. Some positive infrastructure stories are evident – the metro in Delhi, and airports in Mumbai, Delhi, Hyderabad and Bangalore, to name a few. Power tariff hikes in some states, bailout plans for state government-owned distribution companies, and clearance of big ticket projects, are positive developments for India’s power sector. A skill development organisation has been launched to plug skills gap using private participation. The government has organised a single window e-system to educate and track labour law violations.
There is opportunity here for the UK. UK companies are working with both central and state governments to develop relevant skills programmes and quality and assessment standards. In infrastructure, DFID is facilitating private investment in infrastructure and skill development and helping first generation enterprises by providing start-up capital. UK companies are engaged in engineering design, project management and consultancy. We are also working with industry bodies to improve the manufacturing investment climate – in the process tackling many business environment issues which affect UK investors. Other projects promote a bankruptcy code; support first generation enterprises; and encourage investment in infrastructure.
As the UK strengthens its own position on advanced manufacturing, we are seeking new opportunities to collaborate with India’s most innovative thinkers. Research Councils UK India has facilitated seven collaborative research projects in advanced manufacturing, funded by Engineering and Physical Sciences Research Council, with matched resources from India’s Department of Science and Technology. This investment of £7mn also has additional contributions from over fifteen industry players. In November 2013, a joint industrial research funding call between the UK’s Technology Strategy Board and India’s Global Innovation and Technology Alliance made up to £5 mn available for collaborative R&D in energy systems and affordable healthcare.
The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.