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A Quantum Miss

India's stagnant manufacturing sector needs land, labour and supply chain reforms urgently. stimulus measures fall short of expectations

Photograph by Shekhar Ghosh Photograph by Shekhar Ghosh

For the hype around India's manufacturing prowess, its share in overall GDP is nothing to gloat about. Ever since the licence raj was dismantled, the expectation was the economy would prosper on the back of manufacturing. Yet, almost three decades since liberalisation, manufacturing continues to account for just around 16 per cent of GDP.

There are many impediments that hold the country back. Archaic labour laws, difficulties in acquiring large tracts of land for big projects, bureaucratic hurdles, procedural delays, a less-than-efficient dispute resolution mechanism and high power, logistics and capital costs are some of them.

Land, Labour and Logistics

"Reforms are required in the three Ls-labour, land and logistics. We need to take action to produce in a more cost-efficient manner," says D.K. Joshi, Chief Economist, Crisil. "We also need policy certainty to give more assurance to foreign investors. You require good infrastructure to attract investments."

The scope for improvement is substantial. In 2019, the World Economic Forum, in its annual World Competitiveness Index, ranked India at 68, down 10 places during the year. India was the worst performer with its score declining on eight of the 12 parameters. Other countries, including those competing directly for investments relocating from China, improved. In one year, South Africa (60), Vietnam (67) and Philippines (64) became more competitive than India. Indonesia (50) and Thailand (40) are anyway ahead while China is streets ahead at 28.

"The government needs to review policies, infrastructure, regulations to create an environment more conducive for FDI and industry needs to look at product quality, efficiency of operations and develop world-class capabilities," says Ashish Nanda, Supply Chain Leader, EY India. "India needs to adopt self-sufficiency by augmenting domestic value addition in manufacturing."

High logistics cost is a big bump in the road. In India, logistic and freight costs account for 14 per cent of GDP against single digits in most other countries. "In India, we pay among the highest logistics costs as there are hardly any waterways while railways cross-subsidise mobility," says Naveen Jindal, Chairman, Jindal Steel and Power. "Cost of power is prohibitive due to cross-subsidisation."

India's push to build highways and a cross-country GST have smoothened freight movement. But benefits have somewhat been negated by toll charges rising six times in the last few years and high cost of fuel. "We should look at how we can bring fuel under GST because that will allow us to avail input credit," says Vineet Agarwal, Managing Director, Transport Corporation of India.

The infrastructure that supports manufacturing needs an overhaul. It is an area the government has been trying to tackle - ambitious special economic zones (SEZs) and cluster development programmes have been undertaken, but results have been below par. "It is time we initiate a massive public works programme," says Vinayak Chatterjee, Chairman, Feedback Infrastructure. "We should build six coastal economic zones in the nature of free trade zones. These can be used to direct investment that may rebound off China."

"At least five new state capitals should be built to decongest our cities. The river linking plan could be one of the finest public works programme with ecological benefits," he adds.

The biggest issue is red tape. Snail-paced bureaucracy creates procedural hurdles that impact every facet of conducting business in India. The biggest is land acquisition. From highway construction to bullet train and steel plants, almost every project - big or small - gets delayed or suffers cost overruns due to this. The failure of South Korean steel major Posco's $12 billion project in Odisha due to land acquisition issues is a poor advertisement of India's ability to get projects off the ground.

Ease of Doing Business

According to the World Bank's ease of doing business rankings, India fares poorly in registering property and enforcing contracts. It takes 58 days and costs on average 7.8 per cent value of the property to register it. Resolving a commercial dispute takes nearly four years (1,445 days) on average, three times more than in any OECD economy.

Reforms have been initiated, but progress is slow and timelines unclear. The government has talked about power tariff reforms that will do away with cross-subsidisation but stops short of giving a deadline. On labour reforms, Uttar Pradesh, Madhya Pradesh and Gujarat recently came up with new regulations to attract investors but are facing opposition from unions, including those close to the ruling coalition. "Big-ticket infrastructure projects need to be expedited. The government is committed to the idea. We, however, do need a push. In manufacturing, there are issues relating to labour, land, liquidity, and laws," says Jindal.

R.C. Bhargava the chairman of India's largest carmaker Maruti Suzuki, believes the problem lies more in the attitude of the bureaucracy that is tasked with execution rather than overall policy. "The rules, regulations and policies on paper in India are not anti-manufacturing as such. It is the attitude of the bureaucracy and its unwillingness to act as a facilitator that creates problems," he says. "The private sector is looked at with suspicion. Corruption is most rampant as it is taken for granted that a businessman is there to be squeezed."

Some reforms like labour and land are politically difficult. Others like bringing down cost of fuel by including it under GST are also not easy as most states depend on fuel taxes for a large chunk of their revenue. Experts say India should resort to incentives. "Incentives for self-reliance and putting up facilities with world-class scale to reduce cost should be considered," says EY's Nanda. India also scores low on starting a business as myriad procedures make the process cumbersome. The underlying problem is too much state interference.

"Much has been done to improve ease of doing business. It shows in the improved ranking (63 in 2019 from 77 in 2018) but there is scope for more," says Athar Mohammad, Partner, PwC. "Some reforms have to be undertaken by states as subjects they deal with are in state list or concurrent list."

The time to do it is now. The world is at a tipping point right now and the new structure that will emerge out of the debris of the coronavirus ravaged global economy will throw up opportunities.

Tying into Global Supply Chain

Countries are looking to decouple from China, the factory of the world for over two decades now, and realign their supply chain. With a large domestic market and a favourable demography, India stands at a good place to benefit from this. But, it needs a fresh script and incorporate, if not all, most of the reforms talked above.

"We need to make the environment more conducive for companies looking to move out of China. There is a push factor now given the need to realign global supply chains that were established over decades," says Joshi of Crisil. "History is against us. Going by past experience, many companies had moved to nimble countries like Vietnam and Philippines. (But) It is a once in a lifetime opportunity."

To reach the new GDP target of $5 trillion, manufacturing has to do the heavy lifting and increase its share to at least 25 per cent. "As we aspire to become a $5 trillion economy, the journey needs to be supported by deeper reforms and simplified regulatory regime in various areas," says Dilip Chenoy, Secretary General, Federation of Indian Chambers of Commerce and Industry. "The growth rate of manufacturing needs to be in double digits to ensure adequate employment for our young labour force."

So, when Prime Minister Narendra Modi addressed the nation for the fifth time in less than two months on May 12, announcing a Rs 20 lakh crore economic package, he raised hopes of deep structural reforms to spur manufacturing. Modi exhorted India to become economically self-reliant saying the country needed a quantum jump and not just incremental change.

Over the next five days, as the package was unveiled by Finance Minister Nirmala Sitharaman, expectations rose to a crescendo. A host of measures with a smattering of reforms were announced but did not justify the hype. "To say it is disappointing is an understatement," says a promoter of one of Delhi's old business houses who did not wish to be identified for fear of antagonising the government. "The heartburn is not because nothing was done. We are used to being ignored. It was because the government raised expectations of some big-bang reforms. People started talking about this as the 1991 moment, when the economy was liberalised. It is quite a damp squib."

It is not that nothing has been done. Among the measures undertaken, allowing commercial coal mining, raising FDI limit in defence manufacturing to 74 per cent will have far-reaching consequences. Much stress has been laid on local manufacturing and reducing dependence on imports. But it has not culminated into a policy that can be applied to all sectors.

Not Really Reforms

"The steps taken can hardly be called reforms. They are policy interventions at best," says a senior executive at a Chennai-based company that makes heavy machines. "Make industries your priority and simplify procedures."

In his paper "Make in India: The Components of a Manufacturing Strategy for India", Dr. Santosh Mehrotra, who teaches economics at JNU, blames the lack of a coherent industrial policy for the manufacturing sector's inability to thrive. India has not had an industrial policy since 1991 and the last time a policy for manufacturing was formulated was in 2011. A new policy is in the works but is delayed by over four years.

"The planning in the central government must be revived to devise and implement a national industrial strategy. This requires recognition in the top leadership that without a serious manufacturing strategy, and policies to match it, India will never become a major manufacturing nation," he says.

The economic package that promised big bang reforms has not quite delivered on its premise. The opportunity, is still within reach, but the clock is ticking.


Published on: May 27, 2020, 9:41 AM IST
Posted by: Vivek Dubey, May 27, 2020, 9:41 AM IST