In the last 15 years we have forgotten that everything sold in India in the second part of the last century had to be made in India, and manufacturing was taken for granted. How is it that the tables have turned 180 degrees?
A few years after independence we had a foreign exchange crisis and strict import controls were levied. The import of consumer goods was totally banned. In fact, in the 1960s and 1970s, even raw material was not allowed to be imported freely. Import licences had to be obtained and products like plastic raw material had an import duty of over 200 per cent.
With the economic reforms in the early 1990s, imports became quite liberal, but only as recently as 2001, when under the rules of the WTO agreement consumer goods were allowed to be imported. At the beginning of the century, we could import completely finished consumer goods for the first time after nearly 50 years. At first, the import duty on such goods was 80 per cent but since about 2007, the peak rate of import duty is only 10 per cent with a few exceptions, notably automobiles, where imports have been made quite prohibitive.
Earlier, we also had a regime where a lot of consumer products were allowed to be made only by the small scale sector. This resulted in inefficient manufacturing, and thrived to some extent on tax evasion. There was a disincentive to grow and achieve economies of scale.
Meanwhile, countries like China had developed an extremely efficient, and low-cost manufacturing environment. China has become virtually the factory for the world for not only low-wage, labour-intensive products, but also gradually the entire gamut of consumer products like televisions, mobiles, other electronic products and industrial machinery, moulds and dyes, etc.
In India we have everything that China has: a huge young population which is largely uneducated, unskilled and unemployed. We also have a large manufacturing base and an entrepreneurial business culture. However, our labour policies offer such iron clad job security to the workers that it is virtually impossible to close down a factory employing more than 100 workmen under any circumstances. The only way such a factory closes down is if the company goes bankrupt. The consequence of such a labour policy is that the workers have no vested interest in the long-term success of the company, and there is a constant demand for increased wages.
There are frequent disputes and disruptions and there is no emphasis on productivity. Highly productive and efficient units have become more the exception than the norm and in a free trade world regime, Indian factories cannot compete against other countries particularly China. As a result, with imports becoming so easy and so well-priced, manufacturing of such goods in India has become fairly unviable. The irony is that large-scale employment will come only from low-cost consumer goods.
China has created a large manufacturing base by providing an entire ecosystem conducive to low-cost and high quality products. This results in a virtuous cycle, leading to further economies of scale. Countries like India find it difficult to compete with them.
A lot of economists and political leaders make a defensive argument that India has become a service sector-intensive country, and we can also have knowledge-intensive industries like the IT sector. However, as long as we have large-scale unemployment, we have to explore all avenues of the economy, and it is imperative that we promote that sector of industry which has the maximum potential for employment, namely manufacturing.
(Dilip Piramal is Chairman, VIP Industries)