India will have to buck up if it wants manufacturing to contribute 25 pc of the GDP by 2020
S Ramakrishna Velamuri September 15, 2015
During the past year, Prime Minister Narendra Modi and his team have made a strong pitch to investors to "Make in India". According to Daniel J. Meckstroth, VP and chief economist as well as council director of the MAPI Purchasing Council, China's share of world manufacturing was 22.4 per cent in 2012 (up from 2.3 per cent in 1992) compared to 2.1 per cent for India. Can India achieve similar success in the manufacturing sector?
A recent Bloomberg article reported that hourly wages in India and China in 2014 were $0.92 and $3.52 respectively. MNCs with strong manufacturing operations in China, however, find it difficult to move elsewhere. First, the Chinese market size is so big that manufacturing in the country becomes an imperative. Second, the ecosystem productivity in China has significantly compensated for the rising costs. Ecosystem productivity is a function of a number of factors: political stability, business friendly regulations and favourable taxation, cooperative unions, infrastructure quality, and well-developed industrial clusters. According to the WEF's Global Competitiveness Report 2014-2015, China has made a successful transition from a factor-based to an efficiency-based economy, largely because of its ecosystem productivity. It is now putting in considerable investment and effort in making the next transition to an innovation-driven economy.
India's poor ecosystem productivity manifests itself in many ways:
1. A 2013 study by EY and the Retailers Association of India points out that 40 per cent of the delays in the road transport of goods are attributable to state border check posts. The average speed of trucks in India is 20 to 40 km/hr versus 60 to 80 km/hr in developed countries; trucks cover 60,000 to 100,000 km per year in India versus 400,000 to 600,000 in developed countries; and the average distance covered by a truck in India is 250 to 400 km/day versus 500 in the other BRICS countries and 700 to 800 in the US and Europe. According to the McKinsey Global Institute, logistics inefficiencies cost India approximately $45 billion a year.
2. According to an OECD study, vessel turnaround time in the Shanghai port is 0.79 day versus India's over three days average. The Shanghai port handles four times as much cargo (in 20-foot equivalent units or TEUs) as the 13 major Indian ports combined. If our merchandise exports are shipped with seven days delay on average due to a combination of road and port inefficiencies, the financial cost alone works out to $760 million (assuming 11 per cent cost of capital and $360 billion in merchandise exports).
3. A big fallacy we commit in India is to assume that the poor are only interested in low-cost products and services and won't pay more for time-saving technology.
(a) We committed the same mistake about 20 years ago when we assumed that mobile phones were only for the wealthy. Several years ago, I was talking to a seamstress in Mumbai and noticed she had one. She told me that earlier, there were many times when she would go halfway across Mumbai, only to find that her clients were not at home. She said the benefits from the time saved far outweighed the cost of owning the mobile phone, a reason its penetration has reached the high levels that we could not imagine when the technology was first introduced.
(b) This same mindset continues to plague the Indian Railways. A migrant worker from Bihar, who works in Chennai, recently had to rush back to his village because his house had been damaged by the Nepal earthquake. He first travelled from Chennai to Howrah on the Coromandel Express (27 hours). He then commuted from Howrah to the Sealdah station to take the Gangasagar Express (unreserved ticket) to Darbhanga (more than 12 hours). He then took a bus to his village. This entire journey took him well over 48 hours. By inducting technology, the railways can reduce the time taken for this journey by at least half and probably by two-thirds. The reason we have not done so is that our passenger fares are at unsustainably low levels (less than 30 paise/km), so the railways can't generate enough cash to invest in modernisation.
Due to our mistaken beliefs, we impose low productivity on the business community also, hampering its ability to compete. A sales manager, who travels frequently by train, is paying a huge price in terms of lost productivity and lack of comfort. The railways achieved 1.16 trillion passenger kilometres in 2014. Assuming average speeds of 50 km/hr, we are looking at nearly 24 billion hours of passenger time on the railways. If we could save a third of this by increasing the average speed, it would be the equivalent of adding four million workers to the workforce.
4. Intra-city movement in India also results in a significant amount of downtime. Compare the time lost in commuting by executives in Mumbai and Bangalore relative to those in Singapore. Over time, what kind of productivity penalty do Indian managers pay because of poor infrastructure in their cities? In what ways does this low productivity hamper their ability to compete internationally?
5. Productivity loss is attributable as much to antiquated mindsets as it is to poor quality infrastructure. How often do you see senior managers hovering around the CEOs office to meet him? How many of us have had to wait for hours at government offices trying to get paperwork done that could easily be done online?
It would be unfair not to acknowledge the continuous improvement that has taken place in India in all the above fronts. Most cities are in the midst of significant infrastructure projects despite severe financial constraints. The railways management has been doing its best to keep the organisation afloat in the face of unsustainably populist policies. Many government procedures are online today. Many well-managed companies have achieved globally competitive levels of productivity. However, the value of time needs to be appreciated across the political parties, government organisations, PSUs and private firms, if we are to achieve ecosystem productivity, which is necessary for the "Make in India" campaign to achieve its ambitious goal of 25 per cent of the GDP coming from the manufacturing sector by 2020.